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
If I wanted
to become a tramp, I would
advice from the most successful
tramp
Preface,
seek
information
I could
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
The
A
Never Strikes Twice,9
World
Trader,
Legend
Retires,
51
85
Contents
vi
Paul
Tudor Jones: The
Gary Bielfeldt:
Yes,
Art
They
in Peoria,
Do
Trade
PART II
Hite:
117
T-Bonds
vii
B. Rogers,
Steinhardt:
Jr.: Buying Value
They
Want,
151
Weinstein:
Mark
PART IV
Brian Gelber: BrokerTurned
STOCKS
\"One-Lot\"
Stock
FLOOR
345
Triumphs,
387
219
The AH of Stock Selection,
Investment
Marty Schwartz: Champion
as a Treasure
Trader,
257
THE PSYCHOLOGY
V
PART
David Ryan:
Trader,
THE
193
Tony Saliba:
O'Neil:
FROM
The Fearless Pit Trader,367
Baldwin:
The Concept of Variant
Perception,
William
Selling
High-PercentageTrader,321
VIEW
THE
and
283
Hysteria,
Tom
Michael
A LITTLE BIT OF EVERYTHING
III
James
Respecting Risk, 175
MOSTLY
PART
141
Ed Seykota:EverybodyGetsWhat
Larry
Trading,
of Aggressive
Contents
OF TRADING
Hunt, 23?
Dr.
Van
K.
Tharp:
The Psychology
of Trading, 411
The Trade:
A
Postscript:
Dreams and Trading,437
Personal
Experience,
431
Preface
Final Word, 439
Appendix1:
Program
Insurance,
Appendix
Glossary,
Trading
and
Portfolio
441
2: Options\342\200\224Understanding
are
There
the
Basics,
some
stories here:
amazing
443
\342\200\242
A trader
turned
447
out
who, after wiping
a $30,000 accountinto
\342\200\242
A fund
manager
times early in
several
$80
his
career,
million
who achieved what
many
thought
of triple-digit
percentage returns
\342\200\242
A trader
from small-town America who started out on a
has become one of the world's largestbond traders
shoestring and
impossible\342\200\224five
consecutive
years
\342\200\242
A former
securities analyst who, during
has realized an average monthly
return
1,400percentannualized),
\342\200\242
An electrical
computerized
250,000
These are but
a sampling
each
to trading
approach
of
trading
past
seven years,
25 percent (over
stock index futures
graduate from MTT whose largely
engineering
astounding
In his own way,
primarily
the
percent
return
has earnedhis accounts
a sixteen-year
over
an
period
contained in this book.
interviewed has achieved
incredible
of the interviews
of the traders
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
analysis
exclusively,
and still others combinethe
measured
in hours
others
employ
Some
traders operate on a time
two.
or even minutes,
while
only
others
technical
typically
analysis,
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 intend
positions
trading
Acknowledgments
exists.
While
I hardly
expect all readersof this
themselves
into
super-traders\342\200\224the
believe
that
these thought-provoking
world
just
book
doesn't
interviews
will
to transform
First
work
that
way\342\200\224I
over everychapter
help
most
serious
suggestions
and open-minded readers improve
their
personal
trading performance.
It may
even help a select few becomesuper-traders.
and
and
quality
work, it has benefited significantly
of this
I am grateful
JackD. Schwager
Goldens
Bridge,
as a \"book
NY
May 1989
I am indebtedto Steve
I truly
of his input.
believe
changes.
editing
who pored
Chronowitz,
Stephen
book and provided a multitude
in this
and
quantity (hours)
merits
I would like to thank
foremost,
from
of helpful
for both
the
that whatever the
his contributions.
wife, Jo Ann, not only for enduring nine months
board\342\200\224arole
but also for being a valuable
sounding
to my
widow,\"
with brutal honesty. Sample:\"This
is the worst thing you
ever wrote!\" (Needlessto say, that item was excised from the book.) Jo
and I usually followed her
Ann possesses commonsensein abundance,
she performed
adviceunquestioningly.
Of
I would like to expressmy
course,
to be interviewed,
agreed
large,thesetraders
In many
example,
neither
accounts
own
their
one
need
whom
trader
thanks
to all the traders who
would be no book. By and
there
nor seek publicity,
or are already managing
cases, their
as
without
all
as they
the money
trade only for
they wish
for participating
were altruistic.
I was starting out,
expressed it, \"When
motives
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,
*\"
ing
Acknowledgments
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
called
Zircon-212.
These fictitious people in the zoo had a big
about
an Earth-
They were put
on display
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
their
and commodity
quotations
mothers'
arms.
The Earthlings
did
course. And religion got
that the President of the
of
well on paper. That was part of the rigging,
ticker
reminded
them
up in it, too. Thenews
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
very
mixed
\342\200\224Kurt
If the
random
walk
suffering
from
the same
Vonnegut
Jr.
Slaughterhouse
Five
are correct, then Earthbound
delusions as the zoo inhabitants
theorists
traders
of Kilgore
are
Trout's
in Kurt
science
fiction
writer
(Kilgore Trout is the ubiquitous
the prisoners
on Zircon-212 thought
their
Vonnegut's novels.) Whereas
were
not\342\200\224realdecisions
were being based on actual
price
quotes\342\200\224they
believe they can beat the market
life traders
by their acumen or skill. If
novel.
xiv
Prologue
markets
are truly
traders
are attributing
shortcomings,
and
efficient
when in
their
reality
random
success
in every
or failure
time span, then
to their
own
these
skills
or
it is all a matter 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.
My
Own
Story
research
school, I landed a job as a commodity
to
find
that
economic
and
my
surprised
statistical analysis
correctly
predicted a number of major
commodity
price
that the thought
of trading
came to
moves. It was not long thereafter
Right
out
of graduate
analyst. I was pleasantly
mind. The only
permit analysts
problem
to trade.
Michael
Marcus
interviewing
for
was
that my department generallydid not
I discussed my
frustration
over
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 in order to avoid creating any suspicion.
I don't remember any
about my first few trades. All
specifics
recall
is that, 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
I
xvi
My Own Story
since
1953
could
truly
were
determined
by
be
termed
supply
and
free markets [markets in which
prices
demand rather than
the
prevailing
government program]. I correctlyconcludedthat only these two seasons
could be usedin forecasting
I failed to reach the
prices.
Unfortunately,
more
conclusion
that existing data were insufficient
significant
to
permit a
market analysis. Based on a comparison
meaningful
with
these two
seasons, I inferred that cotton prices, which were then trading
at 25 cents
move
but peak around
per pound, would
32-33
cents.
higher,
The initial part of the forecast
correct as cotton pricesedged
proved
over
a period of months. Then the advance
higher
accelerated
and
cotton jumped
from 28 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,
market
level.
moved slightly higher and then quickly
broke
This seemed perfectly natural
to me, as I
back to the
expected
29-cent
to
markets
My profits and elation were short-lived,
however,
as cotton 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
conform
than
to my
analysis.
double
the century's
That
trade knocked
previous high price!
me out of the box for a while. Over
few years, I again tried my hand at trading
I started
with not much more than
instance,
out
of a single
because
large loss. My
the
next
a couple of times.In each
and eventually
wiped
consolation
was that the
$2,000
only
were relatively small.
Two
broke this pattern
of failure.
things
finally
First, I met Steve
Chronowitz.
At the time, I was the
research
director at
commodity
Hornblower & Weeks,and I hired Steve to fill a slot as the
department's
Steve
and I shared the same office,
precious metals
analyst.
and
we
to myself,
quickly became good friends.In contrast
a pure fundamental
Steve' s approach to the markets was
analyst,
technical.
strictly
(The
fundamental
uses economic
data to forecast prices, while
analyst
the
technical analyst
internal market data\342\200\224such as price, volume, and
employs
amounts
I lost
sentiment\342\200\224to
project
prices.)
Until that time, I had viewed technical
with
analysis
I tended
skepticism.
to doubt that anything
as simple as chart
great
reading could
Own
Story
be of any
value.
My
that his market
xvtt
closely
Working
calls were often
with Steve, however, I beganto notice
I became convinced
Eventually,
right.
I realized
of technical analysis was wrong.
initial
assessment
was
for
alone
insufficient
fundamental
least
for
at
that,
analysis
myself,
I
for
the
to
technical
also
needed
successful trading;
analysis
incorporate
that
my
timing of trades.
The secondkey
was the
column
successful
lose
that
I decided
I would
never
on a single trade\342\200\224no matter
how
trading.
everything
view.
market
the
winner's
finally put me into
risk control was absolutelyessentialto
that
element
realization
that
again allow myself to
I was of my
convinced
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
stop order just below the recent
should not fall to new lows.
right, the market
Severaldays later, the market started falling and I was stopped out of my
position at a small loss. The great thing was that after I was stoppedout,
like a stone.In the past, this type of trade would
the market
plummeted
have wipedme out; instead, I suffered only a minor loss.
on the Japanese
Not long thereafter, I becamebullish
yen, which
a good-till-cancelled
placing
simultaneously
low.
I reasoned
had
formed
that
if I was
a technically
bullish
consolidation,
providing
a meaningful
I normally
close point to place a protective stop. While
implemented
I
fact
that
felt
the
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,
able to get away with
that
three-contractposition.The
market
I was
close
a stop\342\200\224allowed
never
me
looked back. Although
to put on a
I ended
of that position
far too early, I held one of the contracts
small
account size.That was the start of my
to
triple
my
long enough
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,
up getting
Instead
out
of taking my loss when
the
market
moved
against me, I was so
xviii
Own
My
convinced
was a reaction in
decline
the
that
this action in
came out bearish, and my equity
took
I
had
surrendered
over
days,
one-quarter
After
market
a bull
that I
The mistake was compounded
my position.
of an important government crop report.
front
substantiallyincreased
chips to buy
in my
cashing
cumulative
a house
by
taking
The
report
decline. In a matter
a dramatic
of my
Story
profits.
and later taking
a
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
I
once
again
subsequently
stalled
had
built my trading account up to over $100,000.
has
out, and during the past year, my account
equity
fluctuated below this
Although,
emotional
level,
on an
my trading has been successful,
a sense of failure. Basically,I feelthat
have
done better.
knowledge and experience, I should
\"Why,\"
my market
I ask myself,
account
more
given
equitymuch
book.
own
early
a sub-$ 10,000
unable
to
expand the
yet
the
answers
any
elements
key
multiples?\"
who
to your success? What
What trading rules do you
trading
multiply
was one of my
I wanted to ask those traders
markets?
the
\"have I been able to
on two occasions,
that level, let aloneby
beyond
What are the
in
with
than tenfold
A desire to find
writing this
peak.
objectively,
I often view it
experiences?
adhere
for
motivations
succeeded:
do you use
approach
to? What were your
had
already
What advice would you
give
to other
traders?
to
While, on one level, my search
help
surpass
my own barriers, in
asking
Everyman,
the questions
for answers
a broader
I 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 Futures Markets (John
Parti
of
Wiley
& Sons,
Futures
and
Currencies
the Mystery
Taking
Out of Futures
one
probably the
fastest
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!*
during
futures
is a lot more than
there
Obviously,
Today's
currencies
pork
trading involved here.
all of the world's majormarket
encompass
belly
rates (e.g., T-bonds), stock indexes
(e.g.,
(e.g., Japanese yen),precious
metals
crude oil), and
markets
markets
futures
interest
groups:
futures
the futures market is
book,
most
It is also
investors.
one of the
by
this
in
least understood
growing.
twentyfold
all
discussed
the markets
all
Of
agricultural
had
now accounts for only
past decade, the
commodities
their origins
about
introduction
in
(e.g.,
has resulted
in the financial-type markets
for
instruments, and stock indexes)accounting
based
the
(currencies,
approximately
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
assuming
futures,
but conservative estimate
trading.
growth of many
and spectacular
500),
energy (e.g.,
Although
commodities,
of total futures
contracts
\342\231\246This
is a rough
gold),
(e.g., corn).
agricultural
one-fifth
S&P
the
an
100/lb. to $150,000 for the S&P 500 at an index value of 300.)
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
the
financial
in
commodity
markets
are not truly
instruments,
have no corresponding
of a futures
essence
The
contract
standardized
market
while
commodities,
many
is in its name: Trading involves a
for 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,
as T-bonds,
counterparts as trading
for a variety
vehicles
of reasons:
of
market
In the futures markets, margins
of margins in stocks.
do
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
concept
not imply
is largely a consequenceof the leverage
of futures
factor.
5. Low transaction costs\342\200\224Futures markets
provide
very low
transaction
costs.
For example,
it is far less expensivefor a stock portfolio
manager to reduce market
exposure
by selling the equivalent dollar
of stock
amount
index futures contracts than
individual
by selling
stocks.
6. Ease of offset\342\200\224A futures
contracts\342\200\224Futures
of quantity
and
quality);
thus,
specific buyer or sellerin order
2. Liquidity
\342\200\224All
of the
are standardized (in terms
the trader does not have to find a
to initiate
or liquidate a position.
major 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
in the
futures
can be offset at
locked
any
time
at limit-up
during
or limit-
down. (Somefutures
markets
specify
daily maximum price changes.
In casesin which free market forces would normally seek an
equilibrium
outside
the range of boundariesimplied
price
by price limits,
the market will
contracts
position
market hours, providing prices are not
7. Guaranteed
1. Standardized
leverage. Roughly
to 5 to 10
margin requirements are usually
equal
the contract value. (The use of the term margin in the futures
is unfortunate
because it leads to tremendous confusion with
initial
speaking,
percent
offer tremendous
markets
futures
Leverage\342\200\224The
the
markets.
futures
4.
trade.
of the
move
by exchange\342\200\224The
to the limit
and
futures
trader
virtually
cease to trade.)
does not have to be
on the other side of
stability of the person
All futures transactions are guaranteedby the clearinghouse
about
concerned
the
simply
the financial
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
relevance
following chapters have direct
stocks and bonds.
have never ventured
beyond
in the
even
to investors
who
The
Interbank
Currency
Market
interbank
The
currency
market
Defined
is a twenty-four-hour
market
which
centers
literally follows the sun around the world, moving from banking
in the U.S. to Australia,
to the Far East, to Europe, and finally
back
to
to fill the need of companies
the U.S. The market
exists
to hedge
of rapidly
values. For
fluctuating
currency
electronics
manufacturer
example,
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
risk
exchange
in a world
if a Japanese
amount
required,
Speculators
from
profit
their
for the
specific future
trade in the interbank
date.
currency
market
in exchange
expectations
regarding
who anticipated a declinein the British
shifts
in an effort to
rates. For
pound against
in
simply sell forward British pounds. (All transactions
the interbank market are denominated
in U.S. dollars.) A speculator who
expectedthe British pound to decline versus the Japanese yen would buy
example,
the
dollar
a speculator
would
0
Introduction
o
a specific
amount
dollar amount of Japaneseyen
of British
and
sell
an equivalent
dollar
pounds.
Marcus
Michael
BlightingNeverStrikes
Twice
Michael
Marcus
began his career as a commodity
major brokeragehouse.His
him
to abandon
near-compulsive
research
attraction
his salaried position to pursue full-time
for a
analyst
to trading
trading.
After
led
a
trader, he went to work for
a
firm
Commodities
that
hired
professionaltraders to trade the
Corporation,
most
Marcus
became one of their
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
brief, almost comical,stint
as
a floor
Michael Marcus
10
Marcusis one of the finest
additional
some
Fortunately,
I have been privileged
friend
persuasion
by a mutual
traders
That's all you
to know.
helped
change
his mind.
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
Marcus for this
a floor trader particularly
He became
animated,
striking.
attempt
about
his
as
soonashe
however,
trading experiences. Our
began talking
conversationfocusedon his early \"roller coaster\" years, which he
of his career.
considered
to be the most interesting
to be
Marcus
Michael
chips
potato
How much
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. That
sounded
very appealing
[he laughs].Idon'tthink
John how he coulddo it. It was such an
spoil
by finding
Weren't
you skeptical?
to
things
cold feet.
out
too
many
attractive
idea
I even
asked
that I didn't
facts. I was afraid I would
Didn't he soundtoo
want
get
Then what
like
a used
car
in anything, and I was very
I hired John,
naive.
advisor at
to be my commodity
trading
I threw
in free potato chips and soda. He had
$30 a week.Occasionally,
diet.
that you could subsist on that
a theory
never
who was a junior
invested
at my
school,
you allot for trading?
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
commodity
that clicked the old-fashioned
front of the
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
away that we had to use
binoculars to see the prices.
That was also very
exciting, becauseit was
just like watching a horse race.
the
kind
My
first
that things
realization
came over the
a voice
when
soybeanmeal. I looked
confidence
and
assurance
\"Do you think
that
John
didn't
we
might
loudspeaker
at John,
at the
It
become
the purchase
recommending
expecting
do it?\"
[he
laughs].
of
to see an expressionof
on his face. Instead,he lookedat
should
scary was
a little
It quickly
me
and
asked,
dawned on me
know anything at all.
I remember
meal was trading
soybean
quietly: 78.30,78.40,78.30,
78.40.We put the order in, and as soonas we the confirmation
back,
got
much
salesman?
No, I had
there any profit incentives\342\200\224extra
I had saved up.
that
$1,000
About
did
money
The
futures?
him?
Weren't
paid
if he did well?
No.
office,
How did you first get interestedin trading
11
almost mystically, the prices started
clicking down. As soon as it knew
that I was in, the market
took that as a signal
to start
I guess
descending.
I had good instincts
even
I immediately said to John,
then, because
\"We're not doing too well, let's
get out!\" We lost about $100 on that
trade.
The next trade was in corn,
and the same
thing
asked me whether
we should
do the trade. I said,\"Well
corn.\" The outcomewas the
same.
happened.
John
all right,
let's try
Michael Marcus
22
Did you know anything
read
anything
all about
at
commodities
about
what you were doing? Had you
or trading?
you
No,
we
the contract sizes?
Sowhere
was
up with
this
story
about
doubling your money
weeks?
I don't know, but after that trade, I was wiped out. So I told John that,
in light of what happened, I thought
I knew
as much as he did\342\200\224which
that
Apparently,
was
the only thing
about
you
I was going to fire him. No more
was nothing\342\200\224and
that
potato
chips;
no more diet soda. I'll never
his response.
He told me, \"You are
forget
making the greatest mistake of your
life!\"
I asked him what
he was going
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
knew.
we went
work either. After
didn't
that,
Right. Our next trade, in wheat,
back to corn and that trade worked out better, it took us three days to lose
it took
success by the number of days
our money.We were measuring
thing
that he didn't say, \"I'mgoing
to Bermuda
and take
a job to make a trading stake.\" He was very specific;
he was going to
wash
dishes
to get his trading
stake.
Were you
always
getting
out after
about a $100loss?
What
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,
although
on that
time
too busy
understood the
to go out
idea
and agreed
we decided
to lunch.
scrutinizing
but
To this
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
the
board,
to the
trade.
That
was the
All the other times we had
we thought
this
was
a \"can't
safe to leave.
By the
time
I have
day,
as a millionaire
been
Did
the
lose\"
for
you?
back, I wasjust about
of shock, dismay, and incredulity.
out. I remember this feeling
wiped
of John\342\200\224he was a very portly guy
I will never forget the
image
and
with
thick, opaque glasses\342\200\224going
up to the quote board, pounding
a
want
to
make
\"Doesn't
fist
and
his
at
it,
anyone
shouting,
shaking
not
bellies
were
that
I
learned
Later
on,
pork
August
guaranteed profit!\"
trade, so it was
eventually
one trade
trade.
I vaguely
me was
amused
that
us to lose.
first
trade
you per tick?
costing
Yes.
Yes,
he come
did
two
every
was
of the
No.
didn't.
Did you know how much it
The logic
contract.
February
ever traded before?
John
Had
even know
13
deliverable against the
flawed in the first place.
No, nothing.
Did
Marcus
Michael
thought
ever enter your
mind that maybe trading was not
we came
No. I had always done well at
of getting
left
$3,000
mother's
i
the
knack
in life
objections.
school,
of it. My father,
insurance,
which
so I figured
who
died
I decided
was just a question
when I was fifteen, had
it
to cash in, despite my
Michael Marcus
14
I really needed to learn something
I knew
But
before
trading
again.
and soybeans, and I also
on wheat
I read ChesterKeltner'sbooks
I
recommendations.
made
subscribed
to his market letter, which
trading
which was to buy wheat, and it worked.
followed
the first recommendation,
I think I made 4 cents per bushel [$200]on that trade. It was my first win
and very
exciting.
Then between letters, the
price,
so I bought
it
and
again
market
to my original
fell back
made another
on
profit
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
the corn crop.
devastated
blight
Was that your first
big
did,
I rather
ring
to it.
In the spring
win?
I took
some
to take
on the way
profits?
up and some when the
down. Overall, I cashed
in
very
started
markets
coming
well.
I
Then
Massachusetts,
Instead
of
I found
but
going
I attended
fall
that
graduate school in
that I didn't want
shockedto find myself
to
about my thesis.
Paine Webber
think
time. I made a little
it
I
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
Then
of the
Floor
laughs].
The
one day\342\200\224I
will
Wall Street Journal with
in the
never
the
forget
this\342\200\224there was
an
\"More Blight on the
in Midwest Cornfields\" [he
headline:
Than
Chicago Board of Trade
corn
market
opened sharply lower and fairly
quickly
went
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.
before
the market
to the
money,
not
since
I had
cutting classes 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
again.
over\342\200\224that is,
Worcester,
to trade.
a great
interesting
then?
even
to class, I would often sneak down
office in Worcester
I was having
getting
the blight had wintered
think
Were
Yes.
that
Was this Keltner's theory, or just a market rumor?
limit-down
you were doing the right thing
So instinctively,
the grains started
1971,
around
and was going to attack the corn crop again.
had survived the winter
I
would
be
decided
really positionedfor the blight this time.
losing it either.
some
more corn, wheat, and
that trade combined with 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
when
of
a speculator. It had a nice
I was
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,
Yes,
decide
told them that
pompously
There was a theory
article
How did you
15
buying
own. I felt I
my
MichaelMarcus
a lot. I was
was on
and moved to
handwriting
of
school
asked
down
was
been a
the
people
Didyou think of getting out on the way
lockedlimit-down?
me what I
that I should get out, but
was hoping the market
would
I felt
then after it locked
limit-down,
I was totally
I
paralyzed.
I watched and watched
and
I couldn't get out. I had all night to think
I just
watched.
turn around.
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.
the market
Was
No,
not
did
you
lose on the trade by the time
did
you
recession at
While
liquidated?
do then?
I wouldn't
anyone
upset.
time.
that
caught on, but
I felt tortured
to be free to
state
trade
charade.
elaborate
this
I wanted
this
during
same old cycle of borrowing
the
in
board
in a manic-depressive
I was
because
Were you making or losing money
I lost. It was
losing it.
big trading
and when
winning, I tried to hide my elation,
make sure not to let it show
on my face. I don't
going through
without
I kept peering out
reports,
on the
prices
weather
I was
to
ever
if I said, \"the
while
time?
money
and
consistently
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,
the main office. When
throughout
you
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
partition to see the
the glass
through
think
I lost my own $30,000, plus $ 12,000of the $20,000
my mother had lent
me. That was my lesson in betting my whole wad.
What
was out,\" that meant one thing,
it
meant
something else.
is cloudy,\"
I was trying to write
While
my market
sun
said, \"the
I was losing, I had
just about 2 cents.
sharply,
Howmuch
sharply lower again on the opening?
17
Marcus
Michael
the analysts
because
let
Goodquestion.
Basically,
doing everything
wrong.
office,
I met
one of the
I had
people
no real graspof trading
in October
Then
to whom
principles;
1971, while at my
I attribute
my
I was
broker's
success.
Who was that?
Ed Seykota.Heis a genius
successful.
phenomenally
and a great trader who hasbeen
I first met Ed he had recently
graduated
When
one of the
from MIT
and
computer
programs for testing
systems. I still don't know how Ed amassed so much
about trading at such an early age.
knowledge
Ed
told me, \"I think you ought
to work here. We are starting
a
research
and you can trade your
own
account.\"
It sounded great;
group
the
was that the firm's researchdirector
refused
to hire me.
only problem
and
had
trading
developed
first
technical
Why?
that
I couldn't imagine
pressed
already
since I wrote well and had experience.When
why
him for a reason,he told me, \"I can't hire you because
you
know
too much
and I want
to train
somebody.\"
I
I said, \"Look,I
18
will
do anything
was
It
already
Marcus
Michael
want.\"
you
I convinced
Eventually,
great, because I had Ed to learn
successful trader. He was basically
a very
principles.
a trend
who
follower,
me how to cut
He taught
Were you making
my
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 exampleturn
did
And
how
They
were
better
I continued
initially.
of money,
I was more patient.
to lose, even with
Ed
Did
you think of just tailcoating
time?
1972
Ed,
for a clearlydefined
Did
you
bring
ever think
myself
because
he was so successful?
up
to keep
that
maybe
didn't
friend
lead
looks
in this joint account?
know anything about the markets. Thiswas in July
controls.
The futures market
price
price
controls.
This was Nixon's price freeze?
As
I recall,
newsletter
on trading?
I ought to stop trading
losing. In \"Fiddler on the
Roof,\"
there
because
saying
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
trading
and, at the time, we were under
go beyond $110, there
was very painful
the
directing
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
to do that.
of just giving
I would sometimes think
had
situation.
Yes.
No, I couldn't
totally out
me money. But I still
confidence
that I could somehow get backon the right
of stubborn
I
was only making
a year, but I managed
to save
$12,500
track again.
a joint
$700. Sincethat wasn't even enough to open an account,I opened
account with a friend who also put up $700.
was supposedlyalsounder
to wait
enough
I was
Anyway,
lend
there.
what you were still doing wrong at that
I think I wasn't patient
would
a kind
Yes,my
Do you remember
because
and out of people who
Were you totally
Not
work out?
the recommendations
as a trader?
around
you
Yes.
model.
role
excellent
the firm at the time?
losses,
winners.
of riding
Ed provided an
for
recommendations
from,
really
utilized classic trading
as well as the importance
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
set
limits?
a higher
What
price?
the law for prices to go higher.
producers
couldn't
What was happening
though
charge more for
was
that
it?
the price was beingkept
22
Michael Marcus
Marcus
Michael
20
artificially low, and there is an^onojrricprinciple that
price will create a shortage.Soshortages^eveTope^nplywood,
also under this
pose^Iptn^utu^^SKeTwas
an
artificiaUyJ[ow_
guideline.
but
sup-
However,
no
at
day, while I was looking
In
hit
then
it
hit $110. Then
$110.20.
$110.10;
one was sure; it was
the quote board, the price
the legal
other words, the futures
price was trading 20 cents over
to see what was going to happen, but
I started calling around
ceiling. So
to know.
seemed
nobody
of a gray
sort
Was plywood the only
market
Yes.Anyway,
nothing
happened.
over $110 that
day.
a matter
the
corn
its price
I think the
market
freeze level?
closed
as
just sell futures and deliver against the
to selling in the cash market at the price control
producers
opposed
level?
The smarter
the infancy of futures
and most producersweren't that sophisticated.
Some
probably weren't sure that it was legal to do that. Even if they
were
ones
trading
producers
at
deliverabove
the
any
price
ever try
but I will get
into
$12,000 trading
grown
Well, ultimately, plywood
first contract, and prices rose, it was
that
the position.
and riding
Was
this the only
markets?
with the futures
to interfere
to that. In just a few months,
back
exactly,
of questions.
$700
plywood.
contract.
big trade
really
not
There were a lot
ceiling.\"
legal
had
one
it was
can
lawyers might have told them,
\"Maybe
people
in the futures
but we better not sell and
market,
their
thought it was,
buy plywood
Did the government
somewhere
that, but
learning
in plywood
Well
of pyramiding
Was that your first
exceeding
didn't
at about $110.80.1 used the
next day it opened
let
If they let it trade over $110 today, they might
it trade anywhere. So I bought
After I bought
went
to $200.
just
One
The
reasoning:
following
area.
Why
contract
after you had been wipedout
in
market?
trade
you
had on?
Yes. ThenI got the bright idea that the same shortage situation was going
to occur in lumber.
I bet everything on one trade just as I had
on the
corn/wheat trade, expecting that lumber
would also go through
the
ceiling price.
Yes.
What
Did the cashplywood
market
It
as a supply
The futures
market
functioned
couldn't get
supplies
elsewhere.
it created
Basically,
market?
last
resort
to users who
legal
black
relationships
price
the
futures
out
because
that they had to sell at the
have any
at a higher
could get their plywood
at the thought
The producers were fuming
with producers
market.
they didn't
legal
price
ceiling.
did
were
doing at this time?
It just watched plywoodgo from $110 to $200.
nothing.
both
wood products, and lumber was also in short
reasoned that lumber
after I bought
lumber
to what had happened
the
longstanding
in
of
a two-tiered market, a sort of
Yes. Those who were frozen
was lumber
at $110?
stay
could
go way
at around
up\342\200\224andit should
$130, the
government
in plywood, and they
same
thing happen in lumber.
The day after I went long, some government
an announcement that
they
determined
official
I
supply,
have. However,
woke up
finally
came
not to let
out with
going to crack down on speculatorsin
had plywood.
The
up the market like they
were
who were trying to run
lumber market crashed just on
lumber
were
Since they
that
statement.
I was down to
the
22
Michael
Marcus
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 at
this
time?
MichaelMarcus
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
Desperation,mainly,
the
that
year,
$4,000, was now
wiped out. It was
office
each
I was
weeks,
constantly on the
two weeks in my
the worst
of being
verge
life. I went
whole
to stop
just
up
the pain, or so that
offered
by
account
would
at least
have
something left?
Both.
I was
so upset that
I couldn't
low
grew
that
you
come
to being
my
$12,000
stop my hands from shaking.
At the
wiped out again?
debasing
say
Yes,and
I never
to yourself,
\"I
believe
can't
I have
done this again\"?
did it again. That was the last time
I bet
everything
on
one trade.
eventually
The
the
and
futures market.
right
theory
provided
currency
wing
and that fit
that the evil government
markets of the
an
with
being
was
constantly
the perfect perspective for
trading
the
I could
make
mid-1970s.
the right theory for the right time.
were so fertile for trading
markets
Right.
The
plenty
of mistakes
then
that
and still do well.
on
the
long side?
happened?
I managed to hold on, and the market
a shortage,
Even after
time, I was politically
Tradingstrictly
What
from Seykota
margins. The lessonsI had learned
in markets
with major trends really paid off. In 1973,my
from $24,000 to $64,000.
futures
had shrunk to under $4,000.
It was
Did you
again.
markets.
inflationary
Well,
$ 12,000 and back to under
that scary experience,I never
to over
After
$24,000.
we were
time,
inflation-alarmist.
How closedid
was a support point on the charts
seem to take out. So, I held on. At the end of
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
you
to hold on?
The next year, 1973,the government
began
lifting the price
Because
the price
controls had created numerous artificial
controls.
in many
run-up
shortages,when they were lifted, there was a tremendous
in
went
Prices
doubled
commodities. Just about everything
up.
many
of the tremendous leverage
and I was able to take advantage
markets,
remember
those
Giving
the willpower
to the
about ready to give up.
day just
worth
you
there
which I had ran up
the $700,
overtraded
gave
although
couldn't
market
that
about staying
those two
During
Right.
or courage that
it insight
Was
really
About$117.
23
the government
finally
turned
around.
didn't seem to have the will
There was
to
stop
the
I did
Yes. Everything
was
well,
going up. Although I was doing very
make one terriblemistake.During
the great soybean bull market, the one
that went from $3.25 to nearly $12,1 impulsively
took
my profits and
I
the
with
was
to
be
instead
of
staying
got out of everything.
trying
fancy
Michael Marcus
24
trend. Ed Seykota never
changed. So Ed was in,
would
while
unless
get out of anything
I was out, and I watched in
the
trend
agony
as
went limit-up for twelve consecutivedays.I was real
and every
competitive,
day I would come into the office knowing he was in and
I was out. I dreadedgoing
to work,
because I knew soybeanswould
be
bid limit again and I couldn't get in.
soybeans
as
aggravating
Yes, more so.It was
didn't
so
work,
said, \"Why
somebody
don't
I was
major
follower,
out
because he was a
Ed, however,
quickly.
had no stop in and ended up being locked in a limit-
stopped
down market for several days in
succession.
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
Each
it
the mental anguish. When that
you take something stronger,
to dull
and
trend
I
\"What kind of a place is this that one's
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
as
that one day I felt I couldn't take
aggravating
and I tried tranquilizers
anymore
market
money?
losing
actually
down
felt a sense ofjoy. asked
of not being in a runaway
this experience
Was
25
Marcus
Michael
It soundslikethe
would
floor
have been even more competitive.
calledthorazine?\"
this thorazine at home and then getting
on the
to
work.
The
close
I
to
doors
started
as
was
to
subway
subway
go
At first, I didn't connect it with the
down.
getting on and I started to fall
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.
I remember
taking
You never threw in the towel
and
just
went
somepoint?
No,
afraid of losing.
I was
Despitethat
account
up
mistake,
to $64,000
Around
that
Exchange.
I would
and
back into soybeans at
time,
screaming.
I learned
that
you
mentioned
before that you built
your
by year-end. What happened next?
you
I was
Were
have an adrenalin
I heard
the traders yelling
though
rush
when
exciting
a floor trader\342\200\224the
being
your field
of
opportunity
down
fact
that
to one
out, I should have been very
in the ring was very exciting
of trading
to me. The truth of the matter was that while I was very good at picking
trades,I was a total bust at the 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
to the Cotton
most
about
concern
were now reducing
a little
worried.
over
like the
but it wasn't.
market?
go
It seemed
maybe,
Did you have any
I would occasionally have to
concerned
However,
about it. As it turned
the thought
the
approaching
on
the
were
floor?
you
you
still
markets as a positiontrader even
yy
place in the world. But
I needed to show $100,000
net
worth
to get in. Since I had
outside of my commodity
I couldn't qualify.
account,
I continued
to make money in the markets,
and after several
I had surpassed
the $100,000 mark.
that same time, Ed
Around
months,
that I go long coffee. So I did,
but I put a close
Seykotarecommended
in
the
under
market
turned
stop
just in case it went down. The market
virtually
Well,
Yes,
but
it was
just out
no assets
So, I assume that many
Right.
of
timidity.]
days
you
weren't
even trading.
26
Michael
Was there any advantage to
No, not
me.
for
on the
being
But I did learn a lot
floor?
the experience,
from
recommendit to anybody who wants to become a better
what I learnedthere for years.
type of things
What
did
you
Marcus
and I would
trader.
I used
floor?
do
you
of information onceyou
You said that the things you
learned
on the
later on.
I
with
off the
with
how
being
bit like being a surfer. I was
My trading in those days was a little
to hit the crest of the wavejust at the
right moment. But if it didn't
a shot at making several hundred
work, I just got out. I was getting
points
would
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
only
those types
of trades, you
have
risking anything.
mat
work as well in
approach
today's
I later
used mat surfing
worked
markets.
technique
as a desk
real well men, I don't tiiink
to make
money,
in
any
under any circumstances.
market,
approach
you
eventually
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
points.
trying
trader. Although
it often
answer?
is the
on the floor, I had
the market responded to thoseintraday
it
point,
adopted?
of intraday chart points, such as earlier daily
importance
a 10-point risk. That was because,
by
becomefamiliar
and hardly
might
floor helped you
At key
only
chart
days, if the market reached an intraday
Now
look
back.
never
and
take
mat
off,
point,
penetrate
those
hi
activity
are
I could take much largerpositions
intraday chart points,
man
I could
afford to hold, and if it didn't
work immediately,
I would
For example,
at a critical intraday
I would take a
get out quickly.
point,
instead
of the three to five contractsI could
twenty-contract
position,
afford to hold,
an
either
took off
using
extremely close stop.The market
and ran, or I was out. Sometimes
I would make 300,400 points or more,
highs.
Right,
the
Is that more restrictive trading style the
the
learned
have become choppier?
because
So what
learn?
use that type
markets
Is that
comes back.
You develop an almost subconscioussenseof the market on the floor.
You learn to gauge price movement by the intensity
of the voices in the
the market
is active and moving, and then gets
ring. For example,when
it is not going to go much
further.
quiet, that is often a sign that
Also,
sometimes when the ring is moderately
loud and suddenly gets very loud,
of being a sign that the market is ready to blast off, as you might
instead
is running into a greater amount
think, it actually indicates that the market
of opposing orders.
But how
27
Michael Marcus
all
your
profits
coming from the trades that
Yes.
Were the other trades breakingeven?
it
The
other
trades
broke even and kept me amused.
met
the
criteria?
28
Marcus
Michael
Did you keep track of
so you knew what
which
were
which
was
that
the
may
even.
I knew
So the
lagged follow-up trades are no longerthere?
Right,
the
money
always
trades?Has
Why are there fewer such
the
gotten
marketplace
more
Yes. Thereare many more
those years, I had an edge
and Amos Hostettertaught
have
traders than
professional
just by knowing
me.
Now
rooms filled with
trading
In those days, you
watched
the
everybody
bright
the
early days. In
that Ed Seykota
in my
angles
knows those principles.
people
and computers.
board, and you would
buy com
An hour later the grain
elevator
when it moved
above a key chart
point.
his broker
and he might
operator would get a call from
The next
buy.
recommend
the trade, pushing the
day, the brokerage house would
market
up some more. On the third
day, we would get short covering
from
the people
that were wrong,
and then some fresh
from
the
buying
dentists of the world,
who finally got the word that it was the
right time
to buy. At that time, I was one of the first ones to buy because I wasone
of the few
traders playing
the game.
I would wind
professional
up
out
to
the
dentists
several days later.
selling
You'retalking
about
short-term
trades.
Weren't
major moves?
I traded
some
Well,
buying
did
the
you
moves, but many times I would
in just that kind of trade.
my profits
in
get back in the market?
they now have their money
invested
don't
with
fund
instead of trading by themselves?
and
even
if the dentists
are still
there,
are trading
they
one-lots,
a
are trading
position
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 meaningless
fund
managers
were getting
who
to buy\342\200\224thepeople
the
Now, everybody is just as decisive,
just
slower.
or reacting
information
the
when
was always somebodyleft
as
fast.
Are the markets
more prone to false
now?
breakouts
Yes, much more.
Are trend-following
then
doomed
to mediocrity?
the era
of trend
following
systems
I believe so. I believe
unless there is a particular
after
shortly
make
since they were
going to keep their positions,
time.
So
when
the
market
fall
would
wrong
back, I would
dentists
at the
you trading for the
Right,
level
their
because
that
that
[The
Marcus is describing.]Another
a major
inflationary
In other words,unless
there
overwhelm
else.
weren't
Yes.
is over until
that
and
overrides
belt, which developed
aperfect exampleof the type of exception
the
in
grain
exception
or deflationary
everything
in a market
imbalance
1988 drought
this interview, provides
everything else.
major
two or three days
When
Is
operator has already bet. The dentists
of trading participation is infinitesimal.
elevator
grain
count because
managers
sophisticated?
You
the market breaks a key chart point,
in. Nowadays, the moment
of
traders.
a
universe
whole
it is perceived
by
go back
was going to be made on the trades that met my
be trades that meet those requirements,but
be fewer of them,
so you have to be much
more
patient.
big
criteria. There will
there
on the other trades wasjust to break
goal
29
going
on?
Just mentally. My
MichaelMarcus
would
be if we were to enter
environment.
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
activity,
trading
to make
The markets
have
changed.
done well for many years,
years because
a much greater
to ten
for
as opposed to the small
all the mistakes?
The proof is that Richard
lost over 50 percent on
funds
who has
he was
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
in
anymore.
The
you
The
1988.
problem
you have
once
reason we don't have many
banks are preventing currency
One
by taking
the
other
good
trends
moves from
anymore
getting
is that
were
you
on the
side of the trend.
that means in
terms
trading style changedbecauseof it?
of trading,
and has your own
Yes.
get
you always trade that way, or did you
the
clock?
around
started
that
so
trading
you
Did
opened:
Hong
Kong,
to
avoid
Zurich,
enough
caught
times
enough times to make me leery.
It happened
a big
be
gap move that you could have
is right. For example,I remember
That
avoided
by
and
London.
the currencies,
It killed my
marriage.
because I feel it is a totally
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
the currencies actively, wereyou getting
up
you were worried about getting caught
of a major move beforethemarketsopenedin the
side
wrong
bailed out
At one
Australia,
because
trading overseas?
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
are
U.S.?
There
I don't
you
trading
the night
would
do
banks
central
the
out of hand
Haven't they always donethat?
What
the
trend-following
is that
out.
central
to determine what
going to do.
through
Dennis,
have
you
situation;
political
When
the
31
Michael Marcus
the next U.S. trading
namely,
tip
their
that
announcement.
have been annihilated.
of the principles we believed in\342\200\224
would always
the governments,
that we didn't
us
saw a surprisepricemove
against
often got out and looked for the reasonlater.
If we
we
I rememberthat
locked
one
illustrates
the big players, including
hand.
understand,
we would
session,
That situation
until
You
must
The currency
well.
market
several
for
limit-down
have
days
futures markets were
in a row after
gotten out right
near
the
that
top of that
market.
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.
European
central banks are notified about major
to make, and they
the price
Consequently,
even if it is because
act ahead
often
move shows up
we initiate.
of something
is
the Europeans,
the price move certainly
I think
the best hours to trade are often
in
by
I was
which
going to devote my
life
in Europe
If it's
an action
going
to occur
an
So you
there first.
If I had a period in
I would want to live in
Europe.
Amos
At the time, he was
Corporation.
Amos
Commodities
who had befriended me at
Hostetter,
alsotrading
some
money
told me that I would bewell advised
Corporation
did
you
Shearson.
But weren't they in business to
to consider
joining
make
money
the original $30,000into
the
along
way?
Did you multiply
the
that
time,
first
a year for
100 percent
and years.
years
What was your best year?
best
must have been 1979.It was
year
it went up
to over
You caught the whole
move?
when
gold
an incredible
year. I caught
$800.
few years, they
gave
they were always taking
me another
money
I was in and out,
but
at a time. It
ounce
was
catching big chunks of it\342\200\224$100per
time. In those days, I would
buy
gold in
it
would
it
$10
go up
higher,
push
up
I
was
able
New
York
the
time
opened,
by
I remember
a wild
Australia, Hong Kong would
and
another $10 in London,
a
sell
at
to
out
$30 profit.
to buying
It sounds like there was an enormous
advantage
States.
in
the
United
the overseas markets rather than
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.
After
handicap.
as a trader.
funny.
money
at least
that
under
for Commodities
At the time,
their theory was that they were going to hire all these
great econometriciansto be traders. They had 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
add
30 percent a year
level.
account
to make 30 percent a year to keep your
return
have had someincredible
given the growth
years,
of your account\342\200\224particularly
My
a call from
I got
had
You must
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?
the traders
taxed
expansionary
first,
initiated
Europe.
to trading,
phase, and they
for
their
to pay
expenses.
in
of U.S. policy
33
Marcus
Michael
$80
million,
or did they
$100,000 to trade. After
out. In those years, they
were
In
those
up
trading
because
days, I had an advantage by being in California,
in Hong Kong when my New York colleagues were
remember
when
I heard
television
news.
I called
and
seemed
nobody
200,000
about
the
Hong Kong
to; the
price
invasion
to
see
wasn't
ounces of gold before anybody
of
I was
asleep.I
on the
knew about it,
Afghanistan
if anybody
changing.
I was able to
what
was happening.
knew
buy
That's 2,000 contracts! Did you have any liquidity problems with
their
on that size position in HongKong?
taking
No,
they
was told
gave
on
me the stuff,
my
but
last visit to
they got fried by doing it. I
visit the
Hong Kong that I shouldn't
of course,
34
MichaelMarcus
Some of the people still
floor.
gold
They knew who was on the
Yes, they
that
remember
side
other
Your transition
episode.
from
of the trade?
Honestly,I think
gold. Then, when
later,
But a lot
of those
I
never done it before.
I had
could
trade off the television news.
That
was the first,
last,
and only
time,
do it.
I did
That particular gold market
Didyou
Yes, I got
out
go up
to
much
better
nearly
in a near-vertical
ended
rise and fall.
in time?
out
get
around
$750 on the
way
up.
I felt sick, when
$900. But later when it was
about
back
I saw
gold
down to $400,1 felt
tipped
you
off that
when
time,
the
But,
never known
people
didn't keep their fortunes.
I was very fortunate.
any
market
before.
obviously
came
to an
happened?
retired from cocoa trading.
Helmut
we had many
and holding
stories. Fortunes
buying
we were
wild
markets.
One of my rules was to get
and the momentum became absolutely
insane.
One way I had of measuring that was with limit days. In those days, we
usedto have a lot of situations
when
a market would go limit-up
for a
number of consecutive days. On the third straight limit-up day, I would
begin to be very, 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
out of the market on that kind of volatility.
day. I just forced
myself
that
by
success
I was
end. What
near a top?
of other
That phase of almost exclusive cocoatrading
it.
All in all, you got out very well. What
were so good, that
By the time the markets got
I had really learned my craft.
a
trader.
then,
By
again,
good
I
had
the
become
that
time,
Also, by
very
advantage of having
I traded
almost
in
cocoa.
For
two
one
market:
years,
knowledgeable
and help I got from
but cocoa,
because of the information
almost nothing
of Commodities Corporation].Helmut
Helmut
[the founder
Weymar
a book
that was so deep I
was an incredible
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
true.
That's
you
markets
profit
ounces.
believe
out
successful
all that
buying
broke
It's hard to
the
lose. There were a lot
couldn't
just
difficult
At
trader to being very
werebeing made.
and
about five to ten minutes
scrambling. I had an immediate $10 per ounce
news
the
started
everybody
on 200,000
you
I was just crazy, comingin
thought
probably
know.
a losing
knew.
No, they
but
being
markets
with the big bull phase in the commodity
during
coincided
How
much
of
success
was due to
to
mid-1970s.
the early
your early
much
was just the markets?
skills as a trader and how
your
they think that you knew something?
Did
35
Michael Marcus
I assume
Helmut
was not nearly as successfula traderas you
were.
volatility
Let's
just say that
I traded
much better on Helmut's information
than
he
did.
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
In retrospect, do you
that trade?
Yes,but
it still
feel
Did you invest any of the
I made
keep
plowing
thing
by getting
out of
money
sat it out and done nothing, I
$2k million.
if I had
of losing
you
were making
in your trading,
it back into 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
service
a number
30 percent
a lot of money on that. At one point, I figured out that
30 percent
was going to the government,
dollar I madetrading,
and lost
for every
naive
as an
alive
lost
large
money
of real estate
number
on all but one of them.
that can claim that
dubious
do everything
I didn't
emotionally.
investments?
analyze anything.
of your early trading
you were repeating the mistake
in something you knew nothing
involved
and
about
then losing money. Didn't any bells go off ? It almost sounds like
instinct in losing your money elsewhere.
had
a self-destructive
you
by that point.
did the right
Out of a fairly
person
a sense,
getting
Yes,
I probably
absolutely.
During this period when
hurt to realize that
would have been OK instead
or did you
you
of me
naive.
think you did so poorly on your
do you
experience:
the starch out
were
distinction.
In
had
were as a trader, you
you
in California\342\200\224I
the only
probably
Why
Did you go back in?
No, they
incredibly
transactions\342\200\224many
an hour.
half
as
investor.
I would
About
37
was going
to support my planes, and 20 percent
was
decided
to sell everything.
support my real estate. SoI finally
going
to
didn't anybody
try
what you're
realize
lost more than
the money
I made.
doing all these unwise things,
the
shoulders and say, \"Do you
you by
you
to grab
half
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
of the emotional impact of lossesin the
any
market?
The reason I ask is that
seem to talk about these
you
losses
investment
very
dispassionately.
what a fool I had been, but I have learned not to
I accepted
it as a life lesson.I learned
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,
it
hurt
to realize
be as attached
Michael
38
ly feel like spoiling myself, I can
charter
a plane;
Marcus
I don't have to
own
one.
that certainly makes sense,but what I am getting at is that I
it
trading,
suspectthat if you had lost the same amount of money
Is that because
more
traumatic
would have been a much
experience.
to these
other ventures?
your ego wasn't attached
I was smart at one
at least,
I always felt that,
true.
Yes, I'm sure that's
I
am
the
I
is
feel like trading
really
good at. If not for
only thing
thing.
shoes.
that, I probably would have wound
up shining
Do you think
skill,
trader
39
I would imagine in your case you
are too large.
orders
can't
put a stop in because
actually
your
Right,
I think
Marcus
Michael
a great
being
trader
is an innate
Having
extreme
upper
skill?
the whole trading experiencefrom
success, what
basic
advice
failure
to
could you give a beginning trader
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
The first
Do you always picka point
Yes,I have
always
done
broker
can hold it.
When you place an order to get
is it accompanied
a position,
into
by
an order to get out?
That's right.
as you put
as soon
thing is that if a positiondoesn'tfeelright
don't be embarrassed to changeyour mind and get right
Another
it on,
out.
echelon
been through
or a losing
my
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.\"
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 the
Yes, but
where
you
will get out before you get in?
that. You have to.
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 everything
was
you
don't
in. When in
that
lots of times
get
out?
know
doubt,
and the
clear.
Do you 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
can't
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
a little
losers
their
hold
may
little short, but
are
own style, you
get
try to incorporate
and bad in
someone else's style, you
wind
often
a
is
the
on the sentiment indexes?
reading
up with the worst
Can you
good examples of market tone tipping you
of any
think
on a trade?
same
type
of confidence
The most classic illustration
I can think of is one of the
bull
soybean
in the late 1970s. At the time,
were in extreme
soybeans
markets
of the
One
shortage.
to hold the
you need to have the courage
position and take the risk. If it comes down to \"I'm in this trade because
Bruce is in
it. So
final
it,\" then
analysis,
you are not
you might as well not
to have
going
in it in the first
be
was holding
\"I have
place.
news?\" \"The
still talk to other traders about
markets?
good news and I have
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
influenced
by their
opinion.
and it still
that we are talking about very talented
traders,
doesn't make a difference.If it is not your own idea, it messes
up
I assume
your trading?
You
Right.
need
to be aware that
the
world
is very sophisticated and
\"How many people are left to act on this particular
yourself:
always
the market has alreadydiscounted
whether
have
to
consider
idea?\" You
your
get
Not
that,
tone.
How
momentum-type
many days has the
market
indicators and observing market
been down or up in a row? What
the
was
weekly
and sales. I
someone from
bad
I said, \"OK, what
news.\"
you
speculative
don't
position
next
three
have a limit
He
said,
is the
good
was
figure
[the
position
size].\" They 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,
Didyou
classic
up
commitments
Actually, I wound
idea.
the
export
is that the export commitment
to be limit-up for the
sell!
By using
news
news is that
maximum permissible
ask
How can you possibly evaluate that?
good
bad
The
market
Not
strong
and
long position in soybeans
called me with the latest export
figures.
Corporation
the courage to stick with
fantastic.
Do you
a heavy
Commodities
the market
pushing
things
government reports indicating
Exactly.In the
off
a lot.
that
because
that
a trade
winners
As long as you stick to your
own approach.
When you
your
41
losses.
you don't have the
isn't yours?
Is it a problem
may cut their
Others
long.
quick
the good
of both styles.I've done
in
too
to take their
Michael Marcus
only
out
of your
but I was so excitedthat
selling.I accidentally
soybeans,
whole position?
wound
which I bought
time I madea lot
of money
back
count of how much I was
short a substantial
amount
of
I lost
up being
40 to 50 cents lower. That
on an error.
was
the only
42
Michael
I remember
a situation just likethat. It was
the
MichaelMarcus
Marcus
bull market
cotton
To this day, I recall I was
when prices almost reached$1a pound.
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.
occurred when we were in a
Another
example,
interesting
in
and all the commodity markets were trading
period
very inflationary
all
the
day, almost
fashion. On one particularly
powerful
lockstep
fell back,
On that day, cotton opened limit-up,
markets went limit-up.
for the day. That was the market
and finished only marginally
higher
I remember,
peak.
Everything
light
of day
else stayed lockedlimit-up,
but
cotton
never saw the
again.
markets,you
to sell
you find a common behavior between
as it starts
as soon
the one that is lagging
acts terribly
a market
to put down a bet when
can't
and
a market
is wonderful
the
news
When
else.
everything
be
short.
sure
to
to
be
want
then
you
go up,
want
absolutely
relative to
kinds
What
of misconceptions
about the markets get peopleinto
trouble?
I think the leading causeof
Well,
you
can rely
financial
is the belief that
disablement
on the experts to helpyou. It might,
if you
Tudor
For example, if you happen to be Paul
be
a
not
bad
it
the
market,
about
he is talking
might
expert.
know the right
Jones'
barber,
and
idea to listen.
Your average
\"experts\" are not traders.
More
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.
Typically,
however,
these
so-called
in a million
I advise
people
misconceptions?
The foolishbelief that
to do.
there
of the great traders in
many
in the markets. I have
is conspiracy
the
world,
and I can say that
99
known
of
percent
the time, the market
is bigger than anybody
sooner
or later, it goes
and,
where it wants to go. Thereare
exceptions,but they don't last too
long.
You haveattributed a lot of your
the
you
principles
success
to Ed and Amos who taught
Have you,
of trading.
in
turn,
traders?
Yes. My
best
worked with,
result,
as well
in terms
I first
When
just
of his becoming the
as being a close friend,
How much of his successdo
if
heading down?
You
other
much of it was
Is the implied rule that
want
Any
43
you
attribute
is Bruce
best
taught
other
trader
I ever
Kovner.
to your training,
and how
his own talent?
met Bruce, he wasa writer
and a professor;
in his spare time,
of 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
he
was
trading
doing
and
some trading.
analyzing
I was
the markets, and I couldn'tcomeup
that he couldn't understand.
I recognizedhis talent
That relates to his intellect, but was there
something
told you that he was going to be a good trader?
Yes, his objectivity. A good
day
with
anything
immediately.
about
him
that
trader can't be rigid. If you can find
then
open to seeing anything,
you have found the raw
of a good trader\342\200\224and I saw that in Bruce
ingredient
I knew
right
away.
from the moment
I first met him that he was
to
be
a
trader.
going
great
What I tried to do was
to Bruce
the principles that Ed and
convey
Amos had taught
me,
skills. My best
along with some of my acquired
occurred
when Bruce and I were
trading
we did some
collaborating;
There
were years when I was up 300
phenomenal trading.
and
percent
he was up 1,000 percent. He had a very
great gift.
somebody who
is really
Do you feel you get ground down
Absolutely.
1983,1
Around
began
as
Michael Marcus
Marcus
Michael
44
to taper off in
my
I felt that
trading.
I
to recharge my batteries.
needed
How important is gut
feel
in trading?
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
you
have any goals aside from
I have taken
for many
karate
years. I am
like to get the black belt.Also,
would
traditions and there is a bit more work
sound
You
at this
trading
point?
at a high
already
I have
level, but
made a study
of
I would like to do with
very vague about it. Do you
want
fun aspect still there if you are doing it
Is the
a trader?
to be
to
talk
about
this. Let me see how
overtrading
or getting
When
you
said
spiritual
put it. Albert
the
is whether
Are you there now?
No.
I would
the
feeling
see yourself trading ten
Yes, it's too
much
probably
a losing streak, how
do
you
handle
it?
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.
Do you
sometimes
to fight your
manage
way
out
of it?
Sometimes, but most
just stopped. I've had
fighter.
of the
trouble
time I would have been better
off
bringing
myself to do that, because
pattern is: Lose, fight like
or sometimes stop, until I get on a winning
The
typical
then
cut
How
long have you stopped for?
back,
three,
Usually
four
hell,
if I had
I am a
lose again,
track.
weeks.
When you are in a losingstreak,is it because
you are out of sync
the markets,
or is there a better way to describe
it?
not where you started off
I started off with
Do you
do hit
disturbed about temporary failures.
with
I'm a lot closer.
But that's
excessively
that.
that the single most important
question
for
is
it
I
think
is
everybody to come to a
universe friendly.
important
is
universe
that
the
inside
feel
friendly.
point where they
Einstein
a day?
hours
I
vague?
I can
thirteen
No. If trading
is your life, it is a torturous
kind
of excitement.
But if you
are keepingyour life in balance, 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
natural
It is very hard
45
that it was an unfriendly
or
twenty
fun to give up. I don't want
just
I think
in the end, losing begets losing.When
that,
start losing, it
you
touches off negativeelements
in your psychology;
it leads to pessimism.
?
years
place.
from now?
to make
a lot more money.
end up losing it in real estate again.
There are very
few traders
who have been as successful
as you.
think makes you different?
do you
I am
very
difficult to
open-minded.
accept
emotionally,
I am willing
but which
to take
I still
in information
recognize
that
What
is
to be true. For ex-
Michael
46
I have seen others
ample,
make
money
much faster than
Michael
only to
Judging by the letters you have mentioned, I take it that
stocks as well. Howlonghave you been trading stocks?
I have
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 of your
Do you
plot
actually
a lot
helpful?
For about the
47
last
two
you
trade
years.
Do you trade stocks differently
than
you
trade
futures?
I'm more patient.
basis? Do you
on a day-to-day
Is the
it?
I have done that
Is that
equity
Marcus
Marcus
No, I look
in the past.
Do you
think it's a goodideafor
traders
trend in
your
is down, that
is a
to plot their
process different?
selection
from the chart,
confirmation
for
market action. I think
you
Do you focus on any
particular
I don't trade
stocks.
can trade
the
fundamentals,
in
the
anything
world
and
the
that way.
of stock?
types
equity?
I think
so.
If the
and reevaluate.Or if you
you
made
it, that
equity
see that
you are losingmoney
sign to cut back
a lot faster than
would be a warning.
the
Dow
each other.
dollar
than
I prefer the little
because
ones,
they are
who are like sharks eating
The basic principle
is that it is better to trade the Australian
the Deutsche mark, and the small
OTC stock than the big
not dominated by the
big
professional
traders
Dow stock.
Are
there
you pay attention to?
any advisors
What
My
knowledge
of the
(CTSL Publishing
CA
Francisco,
Zweig
letter
market
favorite
in terms
subject is the
Partners,
94104).
of readability, imagination,
California
Stock Letter
Technology
Street, Suite 1401, San
put out by Marty
155 Montgomery
I also like the market
letters
360,Bellmore,
The Zweig Forecast, P.O. Box
(TheZweigLetter,
and Richard Russell (Dow TheoryLetters, Dow Theory
NY
11710)
P.O. Box 1759, LaJolla, CA 92038).
Letters Inc.,
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?
I like to 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
with
of value out
the
share
earnings
You
are
and
solid.
paying
I also liketo look at the price/earnings (P/E) ratio in conjunction
the EPS. In other words, while I like to see a company with a
strong
growth
pattern,
for that earnings
I also want
to know
growth pattern.
how much the market is
So
MichaelMarcus
MichaelMarcus
48
a high
like seeing
you
with
EPS
Yes.That's the best
the two on a computerand
combination.
Howabout
performance
the
relative
relative
coming
strength
49
How much common behavior is there between
different
For example, can you trade bondsin thesameway
you
a low P/E.
I am sure there isa way of combining
up with a very good system.
I really feel that
principles
are
[a measure of a stock'sprice
indicatorin
to all other stocks], which is another key
if you
the
same.
markets?
trade
corn?
can trade one market,
Trading
you can trade them all. The
is emotion. It is mass psychology, greed,
and fear. It is all the same in every
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
bullish
you what
relative
a stock
strength
itself.
else you look for
in
a stock?
1988], I
on tanker rates and, therefore,the
shipping
business.
right
is more
the rule than the
an incredible long-term performancerecord,Michael
his trading career with
an unbroken
string of trading
he wiped out not just once, but several times. The
Moreover,
began
not necessarily
[May
For example,
Despite
Early trading failure is a sign that
now
industry.
For most great traders, early failure
I found
annually.
by
again.
second time
trading
rates
become more difficult as the sizeof
the
account
gets
bigger?
Yes, becauseyou
are
being
are
forced
to compete
in
fewer
traded by other big professionals.
and fewer
ultimate
losses.
is:
moral
is
something wrong;
failure
or
success.
potential
it
it particularly
of painful
interesting that, despite a number
losses, Marcus' most devastating
was
experience
actually a
profitable trade in which he got 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),
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
you
Marcus
trading
reasons?
Supply and demand. Tanker
a good predictorof
are doing
exception.
markets that
account
he
up from a very small stake to $30,000 was wipedout
all his money on a single trade. He made
the same mistake
a
had built
betting
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
in the
lumber
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
regarding
necessity
market
decisions.
your own mind
of following
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 the
doing so you greatly
Making
lots
of trades
enhance
key
elements
the probability
line up in
one
direction.
The World
Trader
By
of success on each trade.
when the conditions appearto be only marginally
to do with entertainment than
trading
in favor of the tradeidea has more
success.
Bruce Kovner
Today,
interbank
currency
may well be the
futures
and
world's
trader in the
largest
markets. In 1987 alone, he scoredprofits
of $300 million for himself and the fortunate
in excess
funds. During
the
past
percent averaged
annual
return.
in his
investors
Kovner has realized
compounded
87
a remarkable
Two thousand
dollars
1978 would have been worth
in early
Kovner
with
invested
ten years,
over
ten years later.
$1,000,000
Despitehis incredibletrack record and huge trading size, Kovner
has managed
to keep a surprisingly low profile.Hehas
assiduously
pursued
his
privacy
all interview
by steadfastly refusing
requests. \"You
I
consented
this
to
he said. As a
why
interview,\"
I was, but I did not want to raise the question.I had
might be wondering
matter
of
assumed
that
fact,
his agreement
years earlier,
our
Commodities
paths
reflected a vote of confidence
had crossed
as
Corporation\342\200\224he
briefly when
we
Seven
and trust.
both
worked at
one of the firm's principaltraders,
I as
an
analyst.
Kovner continued, \"It seems
the stories
are usually
distorted
would help establishat least
Kovner hardly
holds positions
with
fits
the
a total
With his incisive intellectand
like
I can't avoid somepublicity,
and fanciful.
one accurate
intuitive
I thought
record.\"
that
image of a trader
face value measured in
easygoing
manner,
and
this interview
who
billions
he reminds
typically
of dollars.
one more
Kovner
Bruce
52
of a professor than
trader in the highly
a giant-scale
and futures markets. Indeed, Kovner
After
from
graduating
at Harvard and
courses
liked teaching,
he
was
the
Kovner
not enthused
the
with
a blank
In
campaigns,
abandonedpolitics
because
he didn't
Although he
have
the
life.
academic
\"I
didn't
page in the morning and
of something
brilliant to write.\"
the early 1970s, Kovner manageda number
with
the idea of eventually
for
running
thinking
science
political
taught
of Pennsylvania.
University
the process of alwaysconfronting
enjoy
out as an academic.
started
Harvard,
currency
leveraged
of
office
financial
He
himself.
or the
desire to work his way up the political ladder from committee
jobs.
as a consultant
for various state and
During this time he also worked
federal
agencies.
Still searching for a career direction,
in the mid-1970s.
markets
to the financial
shifted
Kovner
He believedthat
his attention
his
economics
and he
the right background,
science educationprovided
found the idea of analyzing
the world to make trading
judgments
in
For about a year, Kovner immersed
himself
tremendously
appealing.
He
read
markets
and
the
related
economic
studying
everything
theory.
he could get his hands
on.
One subject he studied intensively
was
rate theory. \"I fell
interest
in love with Haeyield curve.\" [Theyield
is the relationship between
curve
the yield on government
For
securities
and their time to maturity.
and political
example,
than
if each
yield than
rising
successively
a shorter-term
one-year
slope
longer-term maturity
maturity\342\200\224for
T-bills\342\200\224the
example,
yield
curve
provided
five-year
a higher
T-notes
yield
at a higher
would reflect a continually
on a graph.]
Kovner's study
53
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
ber,
and December).
interest rate theory
His first
forward
more
contractbecamethe
spread between the two
That
first
Kovner
was hooked
spread
contractand
supply tightness
the forward
widen.
and
just according to textbook theory
His second
trade also involved an intra-
of one contractagainst
the
sale
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
position.
Although
his idea eventually
proved right,
he
was
too early and lost money on that trade. At the end of these two trades,
Kovner
was still ahead, with his original
to
$3,000 stake having
grown
about $4,000.
really put me in the business. In early 1977, an
market. It was a
apparent
shortage
developing in the soybean
demand driven
than
market.
week
the
crush
was
higher
Every
expected
and nobody believed the figures.
crush
is
amount
the
of soybeans
[The
meal
and soybean oil.] I was watching
the
processed for use as soybean
My third
trade
is what
was
the old crop July
[the price differencebetween
spread
contract and the new crop November contract]. Since it looked like we
were going to run out of soybeans, I thought
that the old crop July
contract would
its
to
the
new
This
expand
premium
crop Novembercontract.
had
in
a
consolidation
been
narrow
near
60-cents
spread
trading
premium
I figured I could easilystop myself
out just below the
July.
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
contracts.
Futures
futures
spread (difference) betweendifferent
traded
months
are
for specific
March, June, Septem(for
example,
soybeans
the price
as a trader.
[the purchase
contract in the
would
contracts
worked
trade
market
July/November
interest
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
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
of trading
predicted
forward
more
between
selling a
political
resources,
BruceKovner
and simultaneously
sold Novembersoybeans]near 60 cents
I put on another spread. I kept on
and it widened to 70 cents. Then
pyramiding.
Bruce Kovner
54
How big of a position
Were you
did you build up?
up to aposition
built
of about fifteen contracts,but
not
only
firms.
brokerage
When
$400.
November soybeans
intercrop spread, such as long July soybeans/short
can prove to be nearly as volatile as a net long or short position.]
He was obviously
with the risk in your position.
concerned
quite
that I had only
Yes.He was concerned
put up $400 margin per spread,
on a spreadwhich behaved like a net long position.
Actually, he wasn't that
far
He was right,
furious. So I moved
brokerage
firm,
but
I
I was
which
shall
off.
remain
my
to another
account
nameless, for reasons that
will
You were furious becauseyou
felt
he was
I am not sure I thought
was
knew
being unfair, but I certainly
I moved my account to a major
or did
he was an obstacle to
my
brokeragehouse,and
got
he
objective.
a broker
the market
until
moved up
to a
certain
level
by a specified amount before adding another unit.
turn
out to be the problem.
did
not
pyramiding
On April
had entered
a string of limit-up
moves.
The market
retraced
My
13,
record high. The commotionwas tremendous.
My
to the moon. It
called me at home and said, \"Soybeans
are going
the market hit
a new
and November is sure to follow.
contracts. Let me lift your
November
shorts
for you, and when
the market
goes limit-up for the next
my
days, you will make more money.\" I agreed, and we covered
looks like July
is going
limit-up,
are a fool to stay
short
the November
November
short
You
few
position.
AH of it?!
All
of
loudly].
it [he laughs
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.
or\342\200\224
Did you end up getting
I got out
you
who was not very competent.
The
market kept moving
up and I kept adding to my position. I had
put on
25; by April
12, my account was up to
my first spread on February
$35,000.
up,
Fifteen
soon
clear.
being unfair,
I would wait
a plan.
had
and then
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,
Well,
position as the market went
before
I started out, I was trading 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 switch
become
to your
adding
just
you have some plan?
I eventually
margin was
55
Bruce Kovner
between
out
limit-down
the dimensions
of the
at limit-down?
and slightly above limit-down. I can tell
loss.
At the moment I covered my
short
leaving myself net long July, I was up about $45,000.
I went into
By the end of the day, I had $22,000 in my account.
shock. I could not believe
how stupid I had been\342\200\224how badly
emotional
in spite of having
studied
the
I had failed to understand
the market,
and I didn't eat for days. I
markets for years. I was sickto my stomach,
thought that I had blown my career as a trader.
November
position
Bruce
Kovner
Bruce Kovner
stake
of only
What
pretty
good
56
But you still had $22,000 comparedto
things
Keeping
$3,000.
original
your
you were still in
in perspective,
57
to the spread?
happened
eventually
The spreadcollapsed.Eventually,
shape.
Absolutely. I was in
good
it went
below the level that
I had
first
it at.
begun 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
of the mistake or was
stupidity
given back that
emotional
such
caused
money that you had
it the
pain?
market.
there
it was the realization that
the money at all. I think
I
had
to
without
was \"fire\" there. Until then,
ridden $3,000 $45,000
No, it wasn't
really
of pain.
a moment
On the way
It
was
did
up,
the
other
couldeventually
No, but
clearly,
way?
to lift
the
truly
capable
of taking
gave it to you. That made a very
they
Actually, I
very lucky to get out
was
I assume
complete
side of my spread position
short
that I had lost a process
me so much was the realization
I realized that the
that I thought I had. At that moment,
were
with
that your quick action that
Even though
money
bothered
rationality
disregard
for risk.
I think
money away every bit as fast
on me.
strong
impression
as
$22,000.
I multiplied
probably
day
averted
you
ended
actually
by nearly sixfold on that trade.
I didn't
understand how risky
money
my
and
up. Perhaps, if I hadn't made
the mistake of riding
the market
gone
my
straight
stupid
down.
mistake,
my
of course,
position
was.
risk?
a
as fast as it
I might
I 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
I'm not sure. At
down
of
broker
that
moment,
I had blown a great deal of
After that day, the market went
up making a substantialamount
on the trade?
insanely leveraged,
controlling
disaster.
Absolutely.
made
decision
that the market streak
of a panic showeda complete
markets
had
my
possibility
middle
the
what
go
the
trade?
Far and away.
Yes.
easy.
to
of
Was that your most painful
you think, \"This is easy\"?
Did you give any thought
in
be true, but for me, that was my \"going bust\" trade. It was the
may
closest I ever came to going bust and, psychologically, it felt as if I had.
That
have
this
day,
when
something
and my sense of what
to that event.
the
I was confronted with
what
I thought
the
realization
that
I knew about discipline. To
happens to disturb
my emotional
equilibrium
world is like, I close out all positions
related
58
Bruce Kovrter
BruceKovner
is a great lead-in. What
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
of the
to the period after
get back
your
start trading again?
About
When did you
trade.
soybean
later. After a few months
a month
$40,000.
that
Around
time,
I had my account back to about
I answered an ad for a trading
assistant
I was interviewed by Michael
Corporation.
idiosyncratic manner. He had me return to Commodities
position
at Commodities
Marcus in
his usual
Corporation several weekslater.
\"Well,\"
news and some bad news.The bad news
a trading
the good news is that
assistant;
he said, \"I have
some good
is that we are not hiring
you as
we
much
money
Thirty-five
Were
you trading
you
to trade?
Yes, and that
is something
the
happen.
you can actually
like he gave
you
make
me that
It is very easy to
me that if you take
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
Right. He also taught
me
one other
one of the most successfultradersin the
caliber.
of traders of your
a small
number
only
different from the averageguy?
You are
world.
There
are
What
makes
you
same
time?
a policy that allowed you to trade
your
personal
well as the company account,
and Michael
and I were very
one can reallydefine
do not. For myself, I can think
ability
account,
aggressive
traders.
why
of
two
some
traders make it, while
important
be
thirty
people,
from today
can
prices
rational
and only
the years, I have tried to train
perhaps
out to be good
or five of those have turned
Over
extent.
four
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
and
taught?
as
Only to a limited
others
elements. First, I have
to imagine
Can trading skills
I am very glad about. Commodities
Corporation had
not sure
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.
at
He showed
dollars.
could
great things
line?
you really can do it. He showed
use discipline,
and
punch
you as a trader.\"
are hiring
did Commodities Corporation give
your own money, as well,
that
point
is the
you could make a million
yourself,
applied
miss the
a position
the
thousand
that
me
if you
I'm
How
59
to the
other twenty-five?
of the 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,
to
take
out. I know
want
at
in the extreme. Theyareable
Commodities
to mention his name\342\200\224always
struck
Corporation\342\200\224I
me as a brilliant
trader.
don't
The
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
ideas he came up
were
with
wonderful;
So where washe goingwrong?
Position
he
much too big. For every one contract I traded,
occasions
double his money on two different
up flat.
size.
He traded
ten.
He would
traded
each year, but
still
end
Do you always use fundamental
analysis
in forming
your trading
decisions?
I almost
always
Is that
trade
I use
a position
on a market view; I don't trade
simply
on
technical analysis a great deal and it is terrific, but
unless I understand
the market should move.
why
that virtually
it?
behind
to say
reason
fundamental
Canadian
the
valuation
of
already
voted.
that
can often
that
I felt
inSant,
the
Canadian
had
dollar was at the top of
sure whether
it was going to roll backwads or
When
the market moved, I was preparedto go with tlat
a major
movement because
we had a conjunction of two important
element!:
in
I wasn't smart enough tc know
change in fundamentals
(although,
which direction it would
the market), and a techncal price
impact
a hill,
and
I wasn't
forwards.
on
breakout
the upside.
What do you mean you weren't
smart
enough to know in which
direction
the trade pact announcement would
move
the market?
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?
It didn't have
that way. I couldjust as easilyhave
aigued
the Canadian
dollar because he
to happen
every position you
take
has
a
the trade
elimination
of
submerge
Canadian
barriers
interests.
would
allow
imports
There
are still
some
that
is a fair
clarify
statement. But
the fundamental
I would
picture.
add that technical analysis
I will give you an example.
I had good arguments
for
the Canadian
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
from the U.J. to
who tdhere to
analysts
that
there
are well-informed
tralers who
argument.
My point is that
know much more than I do. I simply put things together.
Tley knew
which
to
and
Canadian
voted
in the marketplace by buying
way
go,
they
dollars.
Is the generalization of that
I think
up. At
dollar had just changed, and the marlet
to the agreement, I felt
Prior
finishing
one of the major pieces ir the
that
the trade pact was negative for
technical
information.
I can't hold
were
negotiations
completely comfortablesaying
to take.
are unwilling
They are disciplined
A
take
the right size positions.
trader
greedy
always blows
some
really inspired traders who never managedto keep the
they made. One trader
money
days earlier, as the
others
positions
enough to
and contrary
independent,
that did
traits?
distinguishing
any
it to the majority
made
61
Kovner
Bruce
fundamental
development
is often
a good tip-off
example
that when an importart
occurs,
the initial
the
longer-term
of
direction of the
marlet
move
trend?
During
probably would have said \"down.\"
Then
the U.S ./Canadian
the entire picture. In fact, the
trade pact was announced,
changed
had broken out on the upside a few
leads because there are people Wio know
Exactly. The market
usually
than you do. For example,the Soviet
Union is a very gocd trader.
more
Goodtraderin which
markets?
which
market
In currencies, and grains to some degree.
62
How does one know what
Because the
hear
Kovner
Bruce
the
act through
Soviets
are doing?
Soviets
intelligence to draw
about it.
It seems rather contradictory to me that a country that is so poor in
its own economy
should be a goodtrader.
ask people in the
if you
but
you will find out
business,
that
they
are.
It
is
known fact in
a well
Soviets (and others)are
That
communication.
use scramblers
capable
is why
when
they
the
on commercial
of eavesdropping
the large commodity trading
firms
sometimes
very sensitive calls.
are making
there are thousands of difficult-to-understand
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.
Isn't that the basic rationalization
Technical analysis, I think,
is mumbo
That's
a thermometer. Fundamentalists
to the charts are like a
attention
you
can about
says
the market to give you
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
disequilibria and potential changes.
me to existing
alerts
Do you sometimes
say, \"I'veseenthis
market
advance.\"
fundamental
reasons?
behavior.
unusual
on a trade
put
because you
look
at a
chart and
and it is often a forerunner of
pattern
That is, even though
you may not have any
before,
a
that lead
mechanisms
that
who
that the
community
intelligence
is that
point
My
say they
doctor
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
analysis
some
of
traders.
of other
are not going to pay any
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
Technical
Why, or how?
world.
For me, technical
you
what the past activity
about
conclusions
traders may say about the future
commercial banks and dealers,and
running
Yes,
63
Bruce Kovner
has
a great
deal that
analysis?
is right
deal
to me
about a price move out
of a trading
range that
nobody
understands.
and a great deal
Does
that
imply
you usually go with
breakouts?
Sure.
right
and
what's
black
magic?
But the markets
There is a great
tracks the
seen a great
as a trader who has
I would only add that,
is nothing
there
in
a
of
and been
lot
markets,
sometimes.
jumbo.
an interesting statement. What's
technicians
I will do that
disconcerting
technical
for
Yes,
who
past;
more
deal
claim
it does
of
hype attached to technical analysis by some
that it predicts the future.
Technical
analysis
not predict the future.
You
have
to use your
own
to it than
are often
Tight congestionsin
understands
prone
to false
breakouts.
There has to be
that.
which
are usually
a breakout
occurs for reasons that
good risk/reward trades.
nobody
64
Bruce
breakouts that occur becausethereisa story
How about
Kovner
Bruce Kovner
Wall
Let's say you
in the
Street Journal that day?
on an upsidebreakoutfrom a
starts
to move against
you\342\200\224that is,
phase,
when to get out? How do you
back into the range. How do you know
tell the difference
between a small pullbackand a bad trade?
do
consolidation
be much 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
would
That
65
a market
buy
and
the price
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
stop
your
to be taken out. I always placemy
likely
within that range,
stop
some
beyond
technical barrier.
It sounds like you
Well,
the
are
move occurring,
price
I do think
The more
a price pattern
is observed
The
prone you are to have false
of nonspeculative
activity, the greater the
signals.
more
product
technical
that.
that the less explanation there is for
the better it looks.
saying
more
a
by speculators,
a market is the
significance
of
Don't you
I never think
studied
the market
Has
systems
floor
greatly increased use of computerized
trend-following
the frequency
increased
of false technical signals?
the
I think
so.
The
fact that there are billions of
technical systems that
recognition
developed
use
moving
averages
dollars
out there
are
these
billions
going
if a breakout
to kick in. If it
are kicking into
occurs becausethe
the
that prices are moving
it is a lot less interesting
market,
is clear
the
signals.I have
Russians
are buying.
other
because
than
that a lot of
the problem
and
about
that,
because
the
other
people
may be
may be drawn to that
market
the point
the technical aspects of the
shouldn't go there if you are
traders
can get at easily.
point,
if I believe
easily.
To take
or other simple pattern
approaches
helps produce many more false
similar
systems myself, so that I can tell when
systems
obvious
trading on
into
stop
level?
I've
breakouts.
run
using the same stoppoint,
that
Sometimes
it is
about
market
right.
a technical
I try
to avoid
I may place my
too far away
barrier\342\200\224and
for a long time\342\200\224isthat
or
too
a point that
stop
difficult
at an
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
always
mental
it this
way: I've
stops,
or is that not necessarily true?
organized my
are never on the floor,but
of. They
size that you trade, your
of the
because
life
they
Do you feel it
First of all, a lossof
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
money
rules
are very
for trading
is that
the
have to reevaluatemy
and precedent.
of information
medical
For
are very good because
diagnostics
clear. The problem with
developing
the \"rules\"
and investment game keep
the trading
of
changing.I
expert
systems
have
some
time working with
spent
expert
system
we
and
concluded
that
was a poor candidate for this
developers,
trading
because
of
trading decisions encompass too many
types
approach,
and
the
rules
for
the
information
knowledge,
interpreting
keep
changing.
in
fact that you are trading so much
the
Does
years
early
your
make
There are far fewer markets
that you had developed your
own
to provide
an indicator of where the largeamount
trend-followingsystems
under such systems couldbe expected
to hit
money
managed
market.
Do you use your own trend-following systemsto
portion
of the
Yes, about
of
my
How much
degree.
make
problems
diversification
related
money,
for the optimum size
managing?
currently
Over $650 million.
I guess
it
is not
negative
5
but they have volatility
to risk control that I don't like. But, since
I use them to a small
from my other trading,
systems
liquidity
any
last
Yes,
What
offer
money are you
I assumemorethan
the level of your confidence?
so it could be worse.
sufficient
with
trades.
trade
money you manage?
Is that
and
characteristics,
you did
of
the
5 percent.
Overall, my
size than
difficult?
more
it
greater
view.
you mentioned
Earlier
they
a system would
in the
positions.
percent,
do as
would
Computers are good at \"learning\"
highly developed.
when there are clearhierarchies
example,expertsystemsfor
of such
features
have to be very
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?
that
develop a systemthat
because the learning
it is unlikely
think
only
What eventually tells you
to ever
is possible
well as a good trader?
I
the stops get taken
are not mental.
so that
67
Kovner
Bruce
of
year's
are
half
profits
that you really have trouble trading because
liquidity?
of a market
I like
often poor, is copper.In copper,
An example
is due to capital appreciation.
alone were about $300 million.
some markets
insufficient
of that
a great deal, but
I am
in which
now the elephant.
the liquidity
is
68
Kovtter
Bruce
of size can be moved
kind
What
copper beforeit becomes
comfortably
in
like
a market
a problem?
a day,
uncomfortably,
interbank
Can
you trade
liquidity,
but
Yes,I did
a market like coffee,
can develop
sometimes
which
doesn't
have
When you put in
liquid\342\200\224in
other
find
your
to
trying
I don't
be counterproductive,
technically. The
since the time and energy I spend
on coffee diminishes my focus on the currency
markets,
far more heavily.
concentrating
which
I trade
have reached
a size levelthat impedes
Since you have substantialpersonal
funds,
trading performance.
you ever consider just trading your own
related headaches in managing
money
and
avoiding
your
all the
money?
but there are severalreasonswhy I don't. Although I invest a great
deal of my own money in my funds, the portion of my funds that is
to an option that has
managed
money represents a call. [Analogy
risk limited
of
to its
in
the
a
unlimited
event
but
rise,
price
profit
potential
cost in the event of a decline.] I don't say this to be flippant, since my
to me, but a call
my investors is extremely important
reputation
among
is a much better position than a symmetrical win/loseposition.
In most
commodity
currencies,
interest
futures
rates,
words,
to
the
amount
markets,
that are not among the most
or the major currencies\342\200\224do
you
in markets
not T-bonds
orders actually moving
I never
the
market?
bully a market.
hears
often
one
stories about very large traders
up or down. Doesthat
the markets
push
the future
work?
the underlying market structure,
both
and
fundamentally
traders that I know who thought
too highly
of their ability
and
tried to bully the market, ultimately
made
the mistake of overtrading and
with
under.
Without
mentioning
any names, can you
provide
an example?
did
Yes,
Is therea practical
limit
orders
manage
carefully
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
went
you
are very high. I plan to very
size of funds
I am managing.
Talking about that,
deep
enormous trends?
coffee
It would appear that
they
in the
in it.
dollars
last year and made a few million
million
in
$600 million, and I kick in $2
Now, if I am managing
profits
even
on coffee trades,it doesn't
really matter that much. In fact, it could
trade
69
They can, but
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
copper is currently
In contrast, in the T-bond market, you can move5,000
or
trading
spreads.
a problem. You can also move
contracts
without
very
large size, in the
I would say, in
Kovner
Bruce
of money you can manage?
there certainly is. However,in
and a few commodities such ascrudeoil, there
are
There is a recent example
of a British trading organization
into
getting
serious
trouble after they
tried
to corner the crude oil market.
At first
they succeeded, but then they lost control and crude oil pricesfell by $4.
was the end result?
What
They
$40 million and the
about
lost
You are probably managing
trader in the world.How
you
hit
a losing
more
do
you
organization
money
handle
is in trouble.
than any other futures
the emotional strain when
period?
The emotional
burden
losemillions
of trading
of dollars.
If you
is substantial;
on any given day, I could
personalize these losses,you 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
losses
Did you
any
not bother me.
does
losing
I went back and designeda lot
lost about
Was that due to errors
to the
measured
my
When
trade
you
I only use 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 day.
twenty-four
16 percent.
made,
or the nature of
It was a combination of the
two.
first major bear
commodities
markets
Was
in
an
different
have
in
market
My main
characteristics
it a matter of becomingcomplacent
the
markets?
problem was that
than bull
it was
interbank
IMM.
the
experienced, and bear
I had
What
of your
portion
On average,
about
markets
always
being
about
the
principal
characteristic
of a bear market
is
currencies
important
IMM.
did you make that year?
[Crosses
mistakes
buying
British
management
was poor. I had too many
We
trade
any currency
currencies(including
trades.
that
those
and the
is highly
pounds
fixed contractsizes.
liquid.
Mideast
currencies.
we
two
the
five
that
are
all the European
countries), all the major
Virtually
of the Scandinavian
trading vehicle that
are a trade involving
marks is a cross.]You
correlated
from currency
come
profits
you are also trading currenciesbeyond
currently actively traded onthe IMM.
most
money
50 to 60 percent of our
I assume
Asian
My
is in currencies?
trading.
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
trading
markets.
uptrend?
No, the problem was that
What
do you use the interbank market or the
currencies,
market?
futures
years?
you
of risk management
systems. I paid strict
correlations of all my positions.
From that point on, I
total risk in the market everyday.
attention
the
Yes, in 19811
Did you go back to the
disturbs
that
process,taking
have
year?
board?
drawing
The only
71
Was your confidenceshakenat all that
all anymore?
at
Bruce Kovner
Crosses
are probably
the
that you can't trade on the
countries. For example,
foreign
use
and selling an equal dollar amount
of Deutsche
can't
trade crosses on the IMM because
they have
Bruce Kovner
Kovner
Bruce
72
the ratio of the
But you could do a crosson the IMM
by adjusting
to
currencies
two
the
between
equalize the
numberof contracts
of each
dollar value
Is there a reasonwhy
a larger
more exact and direct to use the interbank
and Deutsche
Deutsche mark/British
pound
example,
yen crosses are highly
mark/Japanese
You
say: Buy $100 [million] worth
of yen. In the interbank
market,
simply
For
So actually
there
sell $100 [million] worth
of exchange
unit
the
all over the
economicstatistic out
response currencies,
in
the
than
violently
futures
markets tightly
a very
swift
of an
causes a sharp price
of line with expectations
market
react less
does the interbank
keep the two
market, or do the arbitrageurs
are well arbitraged,
but
those
are the moments when
some money. The
will make
arbitrageur
out of line, but
bit
little
the release
markets
do get
a
because
away
and
the
arbitrageurs
what happens on the
let the stops run.
The
futures
only
to
such
events
be less
is that the locals back
market
thing that pulls the markets back is
have the bank on the
who
interest
banking
against
it.
Can you talk about your fundamental
How
analysis
methodology?
do you determine what the right price for a market shouldbe?
I
assume
that
then I try
to
for a market
on any given day is the correct
price,
out what changes are occurring
that
will alter that
the price
figure
I try to form many
extreme?
Yes,
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
One of the jobs
Will the interbank market priceresponse
other
the futures market can compete,because
can tailor a hedge for any customer.
price.
a lot.
not
date
relations.
banking
or
most
and
right. In addition,
That's
commercial
linked?
two markets
The
world.
where a surprise newsdevelopment
In situations
is
the dollar
of the
in several
efficient
is no way
market
interbank
and
marks
of
is not
hedging usually has a specificdollar
if I need to hedge$3.6million
for
example,
First,
respects.
April 12, the
bank just takes it. The futures market, however, trades
for specific
only
dates and fixed contractsizes,so the hedger
is not precisely covered.
it in dollars,
price
market
futures
currency
requirement.
the
That's right.
percentage
important
active.
you do a mark/yen cross, you
of the two currencies.
when
of one
terms
and very
traded
For
market.
But it is much
not in
the futures
market hasn't been able to capture
of world currency trading?
position.
The
I assume that
73
different
mental
pictures
alternative
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
But then,
all
ten elements
side.
of a good trader is to imagine
of a sudden,
you
will
click. That scenario then
find
scenarios.
keep
should be
trying them on
will
turn
the
world
out to be
may prove correct.
that in one picture, nine out of
becomes
your
image of the
world
reality.
What
percentage
of bank markettrading
activity,
or
vis-a-vis
hedging,
speculative
is basically
commercial
trades?
on that. I don't have the figures
Thebanksare the principal
market.
a hedging
The Fed has donea study
it
represents
as well as a few
players
like
myself.
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
Bruce Kovner
the dollar becomesthe safest political haven, and
In fact, on
could be a tremendous rise in the dollar.
there
as a result,
as many
rise
did
the
dollar
that
of
people
dramatically
week,
Tuesday
the next three days,
from other places. During
withdrew their money
had
confusion.
there was tremendous
By the end of the week,the dollar
In this
scenario,
started to give ground
It was then that
clear to me that
again.
it all
in my mind. It
coalesced
of a need for
the combination
given
became
absolutely
stimulative
action,
by the tremendous worldwide financial panic, the reluctance
to adopt potentially
Bundesbank
the Bank of Japan and German
dictated
inflationary
wide U.S. trade
the continuing
and
measures,
Baker
solution was for TreasurySecretary
to play the stimulative role, and that
had
Someone
States.
As
the dollar would
a result,
drop
and it would not
interestof the other central banks to defendit. I was
that was the only thing that Baker could do.
be
I have an assistanttrader,
up
Are
you
realized
You
So your
to take
action in the
But they
that
the dollar
tense weekend becauseI realized
to open
I waited for the Far East markets
lower.
U.S.
decision
once a week. We
at least
currency
and
making?
what
define
we will do if it breaks
that if currency
X gets to 135\342\200\224
have
buy it or sell it. Thosedecisions
been
made beforehand.
under instruction
to call me if the Prime Minister resigns,
should
are
unexpected
to invalidate
you
currency
revaluation,
the recent scenario.
end
up trading
or something else
at night?
your
can't
trade round the clock. How do you structure
time to balance your work versusyour
life?
obviously
I generally
instructed
to alert you immediately
case
something
currency.
If a
in
big happens?
Absolutely. First
currency
knows
assistant
Are there times
You
breaks
to wake me
hours?
in my country
I go\342\200\224in
Yes. First, I have monitors
my home,
everywhere
a
hours
on
have
a
staff
home. Second,I
day.
duty twenty-four
staff
is allowed
Yes,a lot.
you do a lot of your trading outsideof
Is your
that you delegate the nighttime
We create a scenario for every
convinced
Sunday night.
Do
saying
or if there is a major
might open sharply
he
isn't
really
the ranges we expect for each
currency
out of these ranges.
happens
a very
it
in the
markets?
Yes, and it was
is that
the joke
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.
absolutely
late
and
of the night?
middle
the
a year. But
twice
home
at
He
all this late Friday. Was it too
get calls in
you
of
be the United
would
do
the only
deficits,
to let the dollar go.
someone
How often
75
of
all, we
have call levels in
out of a range that
is under instructions
to call.
we
have
every
previously
identified, my staff
personal
confined between8 A.M. and 6 or 7
important, and if the currency
markets
are very
trade
the Far East, which
at
8
P.M.
The
A.M.
session
opens
in Tokyo trades until
12 P.M. If the markets are in a
of
period
tremendousmovement,
I will go to bed for a
coupleof hours and get up to catch
the
next
market
and
opening. It is tremendously interesting
P.M. The Far
active, I will
try
to keep
East
my trading
is very
exciting.
Bruce Kovner
76
To seethe wave
roll
from
country
Bruce Kovner
Do you
to 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
feel
doesn't
It
like
a
it, you make the whole processsound
at
it
that
look
than work. Do you really
way?
describe
like work,
except when
you
lose\342\200\224then it
feels
like work
market
analysis is like a tremendous
For
The pleasure of it is purely intellectual.
the finance minister of New
it is trying to figure out the problems
will
A lot of people
faces and how he may
try to solve them.
[he laughs]. For
example,
Zealand
But to me, it isn't exotic at all.
he has 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.
think that
in
itself,
sounds
ridiculously
is tremendous
exotic.
fun.
tremendousamount
of
world
economic
I know
markets,
literature.
you read
a
Do you also pay any
So if you see that
at a time
get
a \"guru
Yes, much
Do you
is on
All
the
newsletter
writers who have a large
ter, Zweig, Davis, Eliades,and
stronger.
think people can trade profitably
simply
observing
so on.
following.
People
like Prech-
by just
following
and making
is happening
what
rational
both the importance of risk control
to hold a position.How
having
you typically take on a trade?
talk about
the conviction
necessityof
of all,
single
exposure.
I try very hard
not
trade.
Second,
We do a daily
positionsare.Through
that list?
market
the gurus?
is that to make money, you have to hold a
Probably,but my impression
That is very difficult
when
position with conviction.
you are following
someone else. There are some good gurus, however. For example,in the
stock market, I like Marty
He uses excellent risk control. Unlike
Zweig.
some other gurus, he doesn't believe he is predicting the future;
he is
my
Who
members on your guru list are bullish
is not moving up, and you have some
reason to be bearish, you will feel stronger about the
of the
most
the
trade?
on any
report\" every day.
when
fundamental
First
I
be right
will
to the various market advisory letters?
attention
opinion?
contrary
to be too much of a
not
You
In following all these varied
report as a measureof
guru
your
wiseguy because during major price moves,
for
a
they
portion of it. What I am really 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 try
me,
board.
chess
multidimensional
use
77
bitter
to risk more than
I study
computer
correlation
the
bets.
and
much
the
risk
do
of my portfolio
of my trades to reduce
1 percent
to see how correlated our
I have learned that a mistake
in
analysis
experience,
root
of some
of the most seriousproblemsin
position correlation is the
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 the
Does that
one
Swiss franc, then you decide which
in
that
entire
currency?
long position
you like
and
mark
Deutsche
better and place your
is definitely
be short
else.
something
Deutsche
yen move slower
mark/Japanese
in
trading.
Is that unusual for
Yes, because there
rates. The general
Your trading
in a
you
the
It meant
Very unusual.
market?
interbank
a lot
is: The
is like asking
That
with
of breakout\342\200\224a
type
a typical
was watching
England was not
of
the
level.
3.00
in,
stepping
Once
no one
diagnostics
it
the
violent
and
quick
one\342\200\224much
more
want,
but
he
would
prefer
his condition.
monitoring
are more important
fundamentals
technical
the
that
under
trend-following
the weight
now.
analysis
In the
1970s,
alone. There
most of these systems are using
is true.
will
work
again.
system approach will
of its own size and the fact
similar
that
approaches?
The only thing
that will save those technical
systems
when simple trend-following methodologies
inflation,
However, there is no question in my mind that if we
rates
of inflation,
the technical trading
systems
kill each other off.
the stock
our
conversation
to the stock market. Do you
market behaves differently
other
markets,
countertrends.
After
from
how?
fills.
treating a patient
You need both.
were far fewer false breakouts.
and
Nowadays,
everybody is a chartist,
are a huge number of technical
I think that change
trading
systems.
has made it much harder for the technical
trader.
Let's shift
up
you
there
have stable, moderate
breakout?
a doctor whether
to make money using
a lot easier
was
I think that
Even though your fills are worse?
straight
and
going to put
more reliable.
Yes, it is much
after trading
we are
Bruce,
you,
cross
the trade.
choose?
or with a chart
But, if anything,
will
Terrible
to the
attention
better
of fundamental
a synthesis
if I were to say to
is a periodof high
than
against
positions
room and you can have either all the fundamental
or all the charts and technical input
want,
Do you think
everybody
everyone realized the Bank
wanted to be a seller.
reliable
fewer people paying
less observed, the
are
rule
style involves
But
eventuallyself-destruct
that
or long
net short
than
For example,
necessarily.
a yearlong
Is
rates provide better trading
the cross
that
currencies
only one, which would you
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
believe
information
you
than the individual currencies themselves?
Not
Do you
opportunities
technical
analysis.
Do the cross rates likethe
79
the dollar?
is the idea of
true. But even more important
market.
For example,
in
a
related
a
short
in one market against
trading a long
the
am
I
I am net short the dollar,
long
yen and short
now,
although
right
I like to
if
I
am
In all my trading,
the Deutsche mark.
something,
long
Yes, that
Bruce Kovner
The
for
worse the fills are, the better your
trade.
In that
of hours between 3.04 and
3.02,
the
a couple
to 3.11.
case,
rate went
The
stock
market
has far more short-term
has goneup, it always
wants
to come down. The commodity
believe
that
and if so,
the market
markets
aw
Bruce Kovner
80
driven by supply
will tend to keep trending
prices
shortage,
So if the stock index market
that
technical
approaches
goods; if there is a true
for physical
demand
and
is much
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
changing.
systems will
I have found
catch
the bigger
you
need
to use very wide stops.
Soyou
have
to be
but
that
81
are
stock market advances,
The only way in which arbitrage could be saidto have
contributed
Right.
to the problem, rather
than helped
it, is that if it weren 't for program
out
the
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.
How can he quantify
He looks
that?
at market sentiment
numbers,
but basically
it is a matter
Some critics have attributed the October 1987crashto program
are your own feelings?
What
trading.
different
elements
were involved. First,
to a decline, which
left the stock
rising interest rates and other fundamental
market
vulnerable
causes.
was accentuatedby heavy selling from pension funds
in so-called portfolio insurance.
overly
high
was
triggered
Second,
who
prices
by
that decline
were
made
they
only to be blamed for
the
market
decline
portfolio insurance possible?
Yes.If you read the Brady report, you
will see that the portfolio insurers
of dollarsworth of sales in a few hours.
The
market
was unable to absorb it. Portfolioinsurance
was
a terrible
in name only. In fact, it was nothing
idea; it was insurance
more than a
massivestop-lossorder.If it were not for portfolio insuranceselling,the
market
would
still have gone down sharply,
but nothing
like the 500declinewe
witnessed.
point
cameinto
Do
two
are
arbitrageurs
as
insofar
market
the
with billions
of gut
feel.
I think
may never have been developed.
insurance
portfolio
trading arbitrage,
very long term to filter
of line.]
out
long-term
very
involved
feel
you
great
In a sense.By
have a specialtalent?
traders
definition,
What is the balance of
can only be a relatively
there
superior traders, since trading
is a zero-sum
small
group
of
game.
trading
success
between
talent and hard
work very hard, it
is extremely
unlikely
that you will be a
work?
If
you
don't
good trader.
Bruce
82
Are there some traders who
can
Kovner
coast by on innate skills?
just
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,
do that
can
You
What advice would
give
the novice
trader?
say that risk management is the
I would
First,
you
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
undertrade,
think
most
the need for evaluating
risk on a portfolio basis rather
than
the
viewing
risk of each trade
This is absolutely critical when
one
independently.
holds positions that are highly
since the overall portfolio risk
correlated,
is likely
to be much greater than
the trader
realizes.
One statement by Kovner,
which
made a particularly
strong
on me, concerned
his approach in placing
impression
stops: \"I place my
stop at a point that is too far away or too difficult 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
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
thing to
is my second
important
ought
to be,
cut it at
with novice traders is that they trade three
5 to 10 percent risksona trade
are taking
1 to 2 percent risks.
contracts as possible\342\200\224an approach
which
trades being stopped out before
the market
moves in the anticipated
direction. The moral is: Place your
at a|
stops
point that, if reached, will reasonably indicate that the trade is wrong,
typically
mistakes
other
do novice
traders
make?
are
trade
but
contract,
usually
not
Besides overtrading, what
83
money
undertrade
your position
Kovner
Bruce
as many
results in many
at a point
willing
good
determined
by
primarily
to lose per contract. If the
uncomfortably
large loss per contract,
dollar amount you
meaningful
stop point implies an
trade
a smaller number of
the maximum
contracts.
of the market
mistake
is to think
personalize the market. A common
it
of course, is totally
as a personalnemesis.The market,
impersonal;
a
trader
Whenever
or
not.
make
doesn't care whether
says,
money
you
he is engaging in a destructive
\"I wish,\" or \"I hope,\"
way of thinking
because
it takes attention away from the diagnostic
process.
Kovner's
They
In my conversation
and
complexity
the
time
scope
with
Kovner,
struck by the immense
can't
figure out how he can find
of so many
the economies
I was
of his analysis. I still
to follow and analyze intricately
integrate these various analysesinto a single
fundamental
of worldwide
Kovner's
unique
synthesis
picture. Clearly,
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
different
countries,
let alone
worst
terms it\342\200\224resulted from
trading
a spur
experienceunderscoresthat
mistake\342\200\224his
\"going
of the
decision.
moment
bust
trade,\"
as he
My own personal
there
is probably no class of trades
with
a
failure rate than impulsive
(not to be confused with
intuitive)
trades.
is selected,
the
used, once a strategy
Regardless of the approach
trader should stick to his or her game
and
avoid
plan
impulsive trading
decisions
trade
because
a friend
(for example, putting on an unplanned
has just recommendedit; liquidating
a position before the predetermined
stop point is reached becauseof an adverse
price movement).
Kovner
views a good trader as \"strong,
and
Finally,
independent,
to
contrary in the extreme,\" and points to disciplineand a willingness
make (and accept)mistakesas significant
traits
of the winning trader.
higher
Dennis
Richard
A
Richard
Dennis became intrigued
1960s,
while earning
the
minimum
Retires
Legend
trading during the late
as a runner
on the exchange
commodity
by
wage
of 1970, he decided to take a crackat trading
floor. In the summer
on his
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
a single regular-sized contract representstoo
whom
As a fledgling trader with little risk capital, the Mid Am
was
well suited to Dennis\342\200\224it was also the only exchange on which
he
could afford a 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
to have said, in what must be one of the grand
of all time, \"Let's just say Richie
ran that four hundred
understatements
large
a position.
bucks up
haul,
pretty
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
over
the long
in the
midst of
time of our interview. Several of
lost enough
the
public
during the late 1987-early 1988
Richard
86
loss cutoff point for the cessation of
fate.
As he expressed
witnessed
a similar
personal
in my own
losses
to investors, \"Theseresults parallelimmense
period to trigger
trading. Dennis'
in
a letter
Dennis
50 percent
the
account
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
one
Perhaps
American
concept
of Dennis'
Studies,
Policy
a liberal
think
tank,
and he
supports
the
In recent years, he has
Americans.
tax rates for wealthy
active role in the political
an increasingly
sphere, supporting a
Unlike trading,
his win-loss
ratio in politics
of liberal
candidates.
of higher
taken
variety
has been disappointing.
In
drawing
Denniswas an
the
In
1988 presidential
for the Babbitt
cochairman
national
race, Denniswas the
campaign.
up a list of candidatesto be interviewed
name.
He is one of the foremost
essential
trading
of others interviewed
in
of our time\342\200\224atrader
cited with the phrase,
a number
that
\"I'm not in
his
for this project,
legends
book
this
league.\"
I dealt with
one of Dennis'
assistants.
he
me
he
talk
to
told
would
to Dennis
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 up
the
interview,
the project
About
me.
After
Dennis and that
one hour
was hardly enough
The response essentiallywas:that
Take it or leave it. I
was
all the time allotted; the implicit
message:
if the interview
was
I would get some more time
that
agreed,hoping
purpose
of interviewing
time to cover all
going well.
the
essential
areas.
87
Dennis
Richard
time and was
five minutes
before
the appointed
office.
but decidedly unpretentious
arrived
Dennis
on
the
sat
down
shook
at
his
hands
and
desk.
hour,
precisely
politely,
He apologized in advance
he
if, in the course of the interview,
I arrived about
ushered into
a large
at the
occasionally
glanced
on the
interview
in any
orders.
quote screen, explaining that he could keep his mind
me if he had to put
same time, and would
signal
at the
Having the
of trading
experience
smaller
scale),
I explained
As the interview
began,
there
finitesimally
In my case, I had
parts.
to accomplishthe
task
matter of a genuinely
at hand.
relaxed,and
the
was an element ofuneaseon
of a ticking
In the
personality,
shy
to ten minutes,
five
After
a sense
the
conversation
that
myself (albeit on an in-
I understood.
tension
clock
with
both
our
not enough
time
case
of Dennis, I believe it was a
at least in terms of a first meeting.
was
gone, the atmosphere became
flowed
smoothly.
I began to think that things
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
were 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
shuffled
the
key
through
questions
side of Dennis'
These topics included the
experiences.
Senate
hearings
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
on alleged manipulation
of the
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
89
Richard Dennis
Dennis
Richard
Do you
consider
lessons
learned?
that
I would say this to new traders\342\200\224although
it may not
Yes, in retrospect,
be a reassuringthought\342\200\224when you start, you ought to be asbad a trader
as you are ever going to be.
trading?
Because it is less expensive
After
graduating
and
I dabbled
was making
in
high school, I got a summer
a little bit. With
trading
and losing $40 an
a week,
$40
as a runner
job
minimum-wage
my
hour
small
on the
at that time?
floor
salary, I
I didn't know
trading.
I got to do it with
at least
doing. The advantage was that
amounts of money. I like to say the tuition
I was
what
nonetheless, because of the
worthwhile,
period
was small for what
Right.
You
shouldn't
be too surprised if you
Do you know traders for
I
whom
really
success
early
screw
up.
proved to be their
undoing?
learned.
I heard
the story that
before
you
father stand in the ring, while
turned
stood
you
trades to him.
That
was in 1968 and 1969. My
know much about trading.
He
twenty-one, you had your
on the sidelines signaling
had the membership
father
was just
going along with
but
he
it because
didn't
I was
it was one of
underage and wanted to do it. When
twenty-one,
the
hate this. I have
happiest
days in his life because he said,\"I really
no idea what I'm doing. It's yours!\"
I turned
Were you at a disadvantage trading one step removed,with
father
filling the orders?
I have
noticed
imprinted
like
is their
get
if
mother
your
You're talking
that
have lost very
much
because
you were trading
very
bias to the bullishside because
a subsequent
about
experience?
What gave you confidencewhen
America
Exchange
with
and you were out of the
lost
a warship
Yes.
small.
I probably
that
lost.
consistently
But you couldn't
are a lot of people who
For a lot of traders, it doesn't
matter
so
enough.
you get them young
much whether
their
first big trade is successful or not, but whether
their
side.
Those people tend to be
first big profit
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
make
a lot of money, they
were
with
it.
imprinted
of
Sure. We
variations of that. There
You can teach them
ducks.
a couple
of thousand
dollars
during
you
first
started
such a 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
Dennis
Richard
they traded minicontracts. I had
but not all of them. I don'tknow
I wascuriousabout
in me, and I made most,
mistakes
a few
that I had any confidence.
I just had
have when they get in this business: a need to try
to succeed. I mean, if you
were
on this sort of thing
before
the
betting
work. There is no doubt about
fact, you should have bet that it wouldn't
initial
that.
the
a lot
what
success.
trading
I signed up
successful in
are not
first
the
What were you
year.
doing differently?
for
before
on
positions
capsize even with
that I didn't
right
things
I was lucky
into having
to stagger
in 1970.
enough
me.
on
the big corn blight
my
Since then
right
laundromat
I used up all the
quarters
and had
quarters
phoning trades into Chicago.
nothing but dirty clothes, I had
back to Chicago.
to come
small
that
the
which was
I had just planned to trade over
time.
made a big
the three months and $3,000 in profits
and lasted for about
I went to Tulane in New Orleans
one week. I used
no choice but
doing enough
of 1970,
summer
in the pit for the first
but
summer,
Once
capitalization.
school before the
graduate
I traded
when
impression
I was
school despite your
to graduate
going
your
of people
traders
Most
91
Richard Dennis
have
been a full-time commodity trader?
to mind
as your most dramatic or most emotional
you
Yes.
luck or foresight?
Was that
comes
What
I think
it was
about
the market
the
more foresight.
I had very
then. But a few that
rules, and attitudes
were right, like go with
trading experience?
ideas,
pale
I learned
One Friday,
I believed\342\200\224and
the trend,
stronger
a couple
buying
Monday morning
the
grain
I still
markets
all closed at their
believe\342\200\224that
you
go
with
the better. I remember
getting
of minicontracts in corn, wheat,
they
all opened
up the
limit
highs
for the year.
the trend, and the
in on the close and just
and beans.
because
The next
of the corn blight
One day, I made
only
have to happen, and if it didn't, it would have set
me
back.
It might have taken a lot longer to get to about $2,000,which
to $400 was a real grubstake. But,
it wasn't
like I threw
a dart
compared
and decided what
I did something that should
to do.
work in the long
run\342\200\224I
went
with
the trend.
Is this particular pattern\342\200\224a
market
following
Yes, at a minimum,
on Friday
strong
very
that you find
price action?
it is important
if the market closes at
not
useful as an
to have
a high,
close
I
and it was destabilizing.
loss
big
by reversing my
position
original
I then reversed back to
things
off,
time.
By the
my
original
and losing
position
entire capitalization.
Since then, I have learned that when you
have
a destabilizing
put
a little
and
go home,
end of the
your
take a nap, do something, but
next decision. When you
about
you
losses,
were
getting
I wouldn't have had that
traumatic
would you say that was one of your
so imprinted
with
that
experience
Absolutely. I learned
learned
magnitude,
percentagewise,
experience.
best
trades
you didn't
again?
that
trying to catch up or double up to recoup
affect
a certain amount of loss will
your
to avoid
that
loss,
time between
beat to death, get your
if I had had a
that
make a mistakeof that
losses. I also
are
Lookingback,I realized
out of the mixer.
indicatorof the
at
that was a very
of my
because
or a long position if it closes
to trade.
lost $1,000, or one-
In retrospect,
a loss
school
graduate
I had
on a Friday\342\200\224a
a short position with
I had just quit
bad trade and lost about $300. Since
day,
trading rule
characteristic
week's
head
year.
the error
compounded
get out,
that
first
$3,000,
again. To top
and lost a third
that didn't
Sure
the
a particularly
about
had
I then
third
news.
alow.
was one in
There
trend.
Richard Dennis
92
so
judgment,
you have
to put
time
some
between
that loss and the
next
93
Richard
Dennis
Giving
you a high
the next day you would
that
probability
be ahead?
trade.
I guess a corollary of
that
would
be: When
aren't
things
going
right,
don't push, don't press.
all is said and done, you
your losses and
to preserve
try
capital for those few instanceswhen
you can make a lot
in a very
short period of time. What
afford to do is throw
you can't
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
Yes.
by the
After
have
to minimize
trades.
other
really
big
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,
up
days
Most people thought
was impossible.
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?
It's just an odds play. There
the odds are in your
years?
the
Also, so many
so much catching the
market
trend.
It was
How do you
of volatility
in the
when you go long at
outcome,
limit
but you
bid.
there
been
there
any really bad
or two that you were dead
caused it to be a bad year?
wrong
about
and
When
we
market
a particular
that
had bad trading
have
does it. In those
almost all the
situations,
making lots of false
it is really
periods,
markets
If one
breakouts.
not
one
are going
that
market
sideways and
of the markets is decent, that
is
to avoid a bad situation.
usually
enough
Is there
any year that
successfully.
would
people
They would
get
stands out?
more a matter of
incredibly bad trades just to take a
was locked limit-up
though the market
and almost sure to go up the next day. They couldn't stand the profits
a hole in their pocket.
I would try to get in when they were
burning
getting
at
limit-up,
limit-up,
years you have traded, have
Was
1978was
not
unnecessarilybecause
profit.
is a lot
favor
know
up the limit ten days
went
four or five consecutivelimit-
even
that
pit.
So it wasn't
scalping
a row.
In all the
Was the 1973 soybean market your first
to be in the
in
some of thesemarkets
to remember
have
You
make
I compounded
losses
year for trading.
the transition
from
I was in the process of making
a good
trader to off-the-floor trader and
had
no idea
started
trading
how different
they
floor
were.
out even
out.
Was 1978 the year that
In
1977,1
time
It sounds like easy pickings.
was
mostly
you
a floor trader, and
by
from an office?
1978
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, but if you were disposed to going with
were
trend, it was a deal. They
giving
you an edge to do it.
was
Ultimately,
what
I learned
from 1978 is that
you
have
to be longer term
94
Richard
as a desktrader.
3 cents, I would
have that
in
In the pit,
three guys
and
sell,
luxury
aren't
screen
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
orders.
the
Dennis
Also, the
you
judgments
as good as those made
are indicators
in the
make looking at prices on the
is going
on.
pit watching what
like \"these
subconsciously,
are never
at
market
and
if
all
do
the
same
turns,\"
right
they
at
the
a
same
clicks
on.
It
took
me
a
time,
time
to
thing
light
long
realize that
those tools weren't going to be availableanymore.
there
you
you make the change?
did
Why
that
floor.
Why switch to a desk?
When
I
leam
You were doing really well
in 1970, there were no futures
started
markets
interest rates, or gold. By 1978,these markets
board
currencies
long enough to be viable. The
took several years to get enough volume.
the
on
in currencies,
been listed on the
started
in 1974, but it
had
Richard Dennis
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
the way to do the experiment
right,
I knew
about the markets. We
all the things
codify
bit
about
surprisedhow
Is your basic contention
intelligent
No. We
screened
opportunity
I understand
We hired a group
of
beginning
exist five years earlier.
inundated
initiated
a trader-trainee
at the
beginning
of 1984 and another group at the
What
if I told
because
one
you
players, and we everdo it again,
from chess players.
Was intelligenceone of the
key
we
things we
we would be
of the
items?
I have
a partner who
intelligent
extremely
people.
because
were
been
a friend
philosophical disagreementsabout
since high
you
everything
We have
had
could imagine.
One
school.
of these arguments
was whether
the skills of a successful
trader
could
be
reduced to a set of rules\342\200\224that was my point of view\342\200\224or whether
there
was something ineffable, mystical, subjective,or intuitive
made
that
a good trader. This argument
I guess
I was getting
a little
but it wasn't
the
essential
they
We picked the ones with
item.
To find the
extreme
things
or
intelligent
intelligence
just
available.
program?
Didn't
has
traits,
that we were looking for, we could choosefrom
1985.
was the motivation for this
and
We received
whom
for?
looking
chess
by resumes
It was one of the
What
someone
be right.
would
we thought
it down to forty
people
we picked ten.
narrowed
like to discuss that
I don't
program.
you
that?
was
year
can take almost any reasonably
him into a successfultrader?
that
turn
and
and
Then
to
a little
could
physically
you
that
taught
for people
1,000 applications
interviewed.
them
out I
It turned
management, and trading.
I
but
even
am
say that to pat myself on the back,
how
well it worked.
it worked.
It's frightening
well
individual
I tried
I thought.
money
probability,
I don't
was right.
Let's
argument.
He agreed.
them as well as we
was
lookedfor was
didn't
this
ly,
What qualities wereyou
So,it was the desire to trade more marketsthan
in a single location that
motivated
your move?
And the
95
had
frustrated
going on for a long time,
with idle speculation. Final-
been
Sure, but
you have any reluctance about giving
I don't
think trading
away
strategies are as vulnerable
trade
secrets?
to not
you are
it. I
have
a
idea
about
even
if
is
it
will
work
general
people
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 them, as most
traders
believe.
If what
96
Dennis
Richard Dennis
the confidence
I've heard this
Richard
we taught
our people.
to stick to those rules
How long
the
was
What they couldn't dois give
when
even
them
things are going bad.
that
process?
training
We
got good at it in the second
really
year\342\200\224the course
one week.
a trip
Twenty-three
turtles; that
dropped
three
When you train
tell
them
trading
other
twenty,
however,
per year.
profit
people, you
Dennis? Wouldn't
their
what you are doing?
your
basic approach to the
clones of Richard
twenty
results
be highly
correlated
with
spread. One of the things that we repeatedly told the
class
was: \"We are going to teach you what we think works, but
you are
expected to add your own personal
flair, feeling, or judgment.\"
a huge
are the stakes these traders
How
large
It has
increased
average
What
over the
about $2 million
did they
One hundred
much
my image
of growing
of a role doesluck play
zero.
making money
years
as they
each.
start out with?
thousand
dollars
each.
are
on individual
That is where the
do well.The
people who didn't
markets. Isn't therea risk of creating
was
program,
I had just returned
from
I said,
program
\"We
traders.
this
in trading?
Absolutely
zero.
business
because
I don't think anybody
they started out lucky.
winds
up
total.
in
have averaged about 100 percent
There
became
in
But
We
trader-trainee
In telling someone about the
East.
In the long run,
were the results?
What
Far
took just
there?
were
trainees
to the
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.
97
using?
have made money.I would
say
on
trades, obviously,it makes
confusion
lies.
On any
individual
a difference?
trade
it is almost all
luck. It is just a matter of statistics. If you take something that has a 53
of working
each time, over the long run there is a 100
percent chance
If I review
the results
of two different
chance
of it working.
percent
traders,
than
at anything less than
before
be a couple of years
looking
It might
one
you
year doesn't make any sense.
can determine if one is better
the other.
You are one of the
a systems
trader.
who is both a discretionarytraderand
How would you compare the two approaches?
few people
but they have
traders may do some very intelligent
things,
a tendencynot to think systematically
about what they are doing. For
example, most traders who do a trade that works will not think: 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,
have
the academic
On the opposite extreme, you
types who
ever
lack
the
research
before
have
traded.
seat-of-the-pants
They
they
I did
Mercifully,
systems.
necessary to develop goodtrading
knowledge
Professional
98
the
Richard Dennis
first.
trading
the research wedo is more
Therefore,
to the
applicable
real world.
Can you
would
of how the lackof real
me an example
give
a mechanical
system that often signals
will tend to be a lot of
there
at points where I know
In the real world, it is not too wise to have your
skids.
average
you
accordingly,
the
You mentioned that before you
system, you paid closeattention
you
one thing
and
are
absolutely
opposed,
If they
where
did right
Are
real
world.
a mechanical
trading
process. Did you keep
of memory?
it a matter
developed
to the
trading
and wrong, or was
about everything
I was
and think
observations
down
write
about
them.
I thought
doing.
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
wrong?
Sure. The trading
experience
to want to avoid thinking
tendency
there
is a natural
that
the day is over. I am that way
they are not, it spurs me to want to
is so intense
about
stick
shouldn't
their heads
in
do
the
better.
sand
What
you are saying is that
avoid
thinking
should
be thinking
the
I don't
markets.
other
direction?
you can resolve
until
that
Yes.
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?
I would
the
when it is most tempting to
at all are the times when
you
times
the markets
about them the most.
have any problem
to be flat,
want
probably
segment
So you want to see the market
before you'll commit?
What
is more
trend
and
since
I tend
to weigh the
of trading about equal with
the
technical
of turning
around
element.
and trend-following
display somesigns
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 a new trade counterto
What
I've certainly
as a rule
like
from a high
centsonly
it\342\200\224that
is,
I don't
of trades
yes,
Generally,
I am obsessive about
done
of thumb,
Do those type
story
Right.
the
a prevailing
trend?
When things go
and just hope it gets
better.
about
you do nothing
in
it once
when things are working.
when
But,
think
about
what I'm doing and how I might
bad, traders
point
systems trend orientedin nature?
most of your
psychological,
opinion-oriented
Yes, I would
systems
your
Also,
stop.
to do consistently poorer in
a log of what
stop
that system is going to have aboveIf you don't understand
and adjust the results
that
are going to get a systemthat looks
great on paper, but is
else has their
everyone
experience
where your feelings as a trader tell
in a situation
do
to do
conflict.
placementof stops
going
world
researcher?
the
As an example, assumeI develop
stops.
What do you
you
hurt
99
Dennis
Richard
going
of
seven
think
made
you
do more
countertrend
initiations.
do it.
should
However,
poorly than other trades?
every now and then they may give you a great
I did.
short sugar at 60 cents, which
[Sugar plummeted
66 cents in November 1974 to a relative low under 12
although
months
later. Each 1-cent movein
sugar
is worth
$ 1,120
100
Richard
contract.
often
trade
stories
like
broad
positions
that. But I
class of trades I
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
exception?
idea
The
Right.
absence
the
be there if that
much
that one side of the
market
of anything
true.
was
else is an
There
in the trade.
risk
is much
illusion.
The
were plenty
of
more likely to work
market just wouldn't
guys who went short
at $4 in 1973, because just like sugar at 4 cents
soybeans
couldn't go any
not
Well,
higher.
only did they go
in a matter of four or five months.
of $12.97
that I think is as important:
at $4 couldn't go any
beans
lower,
be that
there wouldn't
Otherwise,
in
101
Dennis
Richard
A large trader like Dennis will
I've got ten
of contracts.]
measured in thousands
in
all
I
don't
think
the
have to tell you,
honesty,
done
like that have been profitable.
have
per
Dennis
they went to a high
There is another point
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
higher,
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,
So don't be too tied to history?
Right.
And
When
like that,
do a trade
you
\"
is so-called
downside
eventually throw
in
limited,
the
that
\"
is, buying
do you
a market because the
just ride it out,
yet,
all your rules are basedon history.
maybe
it is
how do you
No, becausea good
know?
Maybe
it is going to 2 cents;
going to 1 cent.
I guessa main
the
is that you are constantly giving
concern
up
t
he
more
a
bear
in
forward
months.
the
market,
[In
premium
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
between
and
May
trend-following
are
the
trend
system will keep you in the market
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
that.
than
that was the wrong
conclusion
because it went up
Obviously,
another
$8. A good trend-following
you in for most of the
So you
system, however,would
have
kept
move.
don't want to draw boundaries from
history
over
market
behavior?
October.]
Right.
Sure, you
a contradiction
or do you
towel?
until there is evidence that
You throw it in. Because
Is there
there?
forced
out at 3 and get back in
at 5.
Then it falls to 3 again.
structure
much
The
means
approach is to say: This structure
up, and this
no
never
but
that
this
structure
this
means
more,
up
up
correct
means
and no more.
102
When
that
Dennis
Richard
of the system
you trade a system, do you go with the version
command
out best for the past, or do other factors
tested
Richard Dennis
Could that
103
been
have
training program\342\200\224to
try
reason for developingyour
a subliminal
the decision-making
to diversify
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 only
performance
difference if you
believe
will fit
better.
the
future
well be worth that 10 percent
set, as measuredby past data,
it might
10 percent,
you
the suboptimal
level
some
we
although
times the
have
currently
it would. I don't think
may
amount
we
have
$120 million
in
reached
that point yet,
from
it. I think about three
be just about it. We
not be tremendously far away
we are handling now would
about
we
advantage.
In
have trained for trading
Is slippage
betweenthe
trading
a problem in
execution
a system.
When
If
you
tells
therefore, don't
have
all your
many
wall
yet?
different approaches
orders going
in
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.
costs
Do you
define
are
computer
building
the cost of
by having
you
are clearly
breakeven, but a significant
probably
wrong there too.
amount
are around
you
has passed,you
get
maximum
your
risk point when you get into
wrong.
of time
a trade?
you can handle severalhundred
million
dollars
case
point.
The only choice should be
out quicker.
that
literature
there
anything
in trading?
Is
trader,
or did
other traders
teach you
were worthwhile?
I would say I am
published
decision
a
significantly
when
estimate
a loss on a trade after a weekor two,
have
Even when
lessons
using
by
position, at what point do you know you are
to get out of the position?
you
Are you largely a self-taught
are
price
Also, we reduceour
a major
hold
you
wrong? What
to
No.
Is that because you
assumed
funds.
customer
the
is the difference
[Slippage
price.]
We try to make a hard-nosed
into
we
money.
trading?
your
theoretical
and the actual fill
program
No.
customer
You should always have a worst
In other words, you haven't hit
any
thought of it that way, but it did work to our
we are going to try to market
some of the traders
hadn't
fact,
our own brokers.
trader,
a very small trader to a very
large
You have gone from
being
find
Do
outside
you
are
that
now
money.
managing
you
especially
more
it
Does
become
substantially
in
the
that order size gets
way?
when you are trading size?
to be successful
difficult
At
Actually,
self-taught.
What
is really
amazing is how little
there is on trading.
you can recommend to peoplewho
are
interested
without
I think
Edwin
Lefevre's
Reminiscences
of a StockOperator[reputedly
a
304
semifictionalized biography of JesseLivermore,
the feel of trading
and captures
trader] is interesting
book was written
years ago.
sixty-five
Richard Dennis
stock
but that
say
the stock
stock market
also behave
legendary
well,
pretty
you
can
talk
assure that you get in
should
A trend
could easilybe defined
No.
If I see a trend
The question
market
should go up, I might
I'll wait
How much
common
of beans
patterns
have their own
I could
buy
a trend?
eventually I'll have to get in.
and that might depend
I get in
earlier
reacting
to news.
earlier.
If it goes down
or later,
If a market
when
goes
up when
it should
it
go up,
is there between markets? Are the
behavior
or do markets
similar to the patterns of bonds,
knowing
the name
Well,
market is an exception?That is, does the
like
other
or does the stock
markets,
behavior
pattern?
separate.
of the
market.
on individual
research
my
closer to random than
are
commodities
Do
are
they
that there is not
createsufficient
trends
aren't as many
commodities
markets?
There is not
enough
same
you are saying is that
patterns
in different
we don't
research,
if a system
care about it.
There
flow of information
as in the
not enough fundamentals. Just nothing
information,
In the
is basically
commodity markets, technical information
volume, and open interest. Sincethereissomuch
technical
information
available for stock indexes\342\200\224advance/decline
confined
to price,
ratios,
various
groups
of stocks,
sentiment
indicators,
etc.\342\200\224doordinary
more
relationships between different
trend-following
systems start off
use enough
don't
information?
markets are very
similar.
Yes.Inour
per stock to
character.
on.
at a big disadvantage becausethey
So, what
information
them from their random
as there are stocks.
to move
the
are
fluctuations
Demonstrably,
phenomenon?
fundamental
enough
price
stocks are random.
for that
In other words,thereis not
commodity
stocks showsthat
in commodities.
and, arguably,
trending
have an explanation
you
going
personalities?
trade without
own
its
it is probably
I believe
system. Is there
is better defined.
the trend
until
a simple
I know
developing,
is whether
on how I see the
using
trend.
that
you look for to define
that
special
something
105
Why would you say that is true?
gets us in
The market being in a trend is the main thing that eventually
idea.
That is a pretty
a trade.
Being consistent and making sure
simple
than the particular
do that all the time is probablymore
important
you
characteristics you use to define the trend. Whatever method you use to
enter trades, the most critical thing is that if there is a major trend, your
approach
you
I think
about
any secrets?
revealing
Would
market have
some key trading strategies that
Are there
without
the
Richard Dennis
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 against program
on the
thoughts
Richard Dennis
How about fallacies
trading?
The
The
that are complaining ought
people
Do you
mean
of themselves.
ashamed
to be
in the financial community?
people
Yes. They
should
have
of what they
are
complaining
the
inanity
that technical
factors are not
any analysts
whose work you
there
are a lot of
There
scapegoat
for
a
is good.
Would you consider the work of
outside
analysts
No. When we
taught
It is a good excuse for
Sure.
claim is that
clients.
The
pockets
of the
caused
prices
opportunities
for
from
a bit,
job for yourself and your
a lousy
doing
are taking money out
traders
program
who
people
could be further
market around
are investing
stock
the
in
market.
the truth. Program
move
trading
may
but not in any systematic
way. If
to go too high
of
the
Nothing
the stock
program trading
or too
low, that should provide better
investor. Of course,it's bad for those people who
value investors, but are
really traders.
the value
pretend they
are
Howdo you
handle
a losing
streak?
Cut back. If it is really bad, stop and get out.
Do you
sometimes
need
to get away from the
Generally,it just
of time.
takes a day or two, but
It is almost like a pitchernot
to stop at least for that second.
a pause. It could be for just one
he has
for a few days?
markets
you
do need
balking.
Before
That is what
to stop for a period
he throws the ball,
I try
is the biggest public fallacy
our
everything
you know about
you call the floor and
tell
Then
the
hypothetical
markets
you
that I'm
Why do you handle other
people'smoney?
on your own.
You
they
in
a
question:
indicates
a \"buy.\"
selling. Do you: (a)
(c) do nothing?
If
they didn't eventually understand
correct because they have to make
their own market
decisions,then they didn't fit into the
program.
buy,
(b)
go short,
that
(a)
was
are
doing
very well
there
is one big
Well,
advantage: managedmoney
offers
potential
return
with no risk. For ten
years,
have been
people
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 understand
the value
of cutting down
own
risk. I could have traded
your
smaller
and
had
a
smaller profit and smaller risk.
But
if customer
comes
I
money
in,
could
use that to supplement the
and still
profitability
keep my risk lower. It
just
gives you a better deal.
to do\342\200\224at
least
day.
about
market
behavior?
influenced
Dennis
by the aggravation
changed
management
sense.
business,
saying:
his mind on this
subject,
related to large lossesin his
Dennis decided to extricatehimself
That markets are supposed
to make
to trade, I had a
people
Suppose
In a later interview,
What
as an input
market?
declining
have
respect?
example,
trade?
as the
important
them/Zweig)for
about.
Do you see program trading as a convenient
as
fundamentals.
Are
sophistication to understand
enough
belief
regardingtechnicalanalysis?
\"I found
gradually
that it
was
possibly
public
from
the money
more
trouble
than
funds.
it
was
Richard Dennis
108
The
were
were not financial; they
psychological.\"
is from that second interview.
costs
The
worth.
material that
follows
Dennis
Richard
market is that much
right away?
If the
position
Sure. If you
I know this is not
ask
trading
loss cutoff
percent
Is that
1988.
April
to be
Some of
it.
you about
in
going
your favorite subject, but I've got to
funds you managed ceased
the
public
because they reached the automatic
50
point?
Actually,
they
were
trading.
Rather
than
liquidated all
positions
down just
49
under
when we
percent
stopped
we
point,
trigger the automatic termination
to allow a lower cutoff
and resolicited the investors
situation
do anything
Would
you
particular
experience?
I would
cut back a little
differently
in
of this
because
future
the
doubt about
are really
Do you
think
markets?
than
I did, but
the
trades
would still be the
were bad. Well,
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
Someone
said to me, \"You
the markets
claim
A large part
our point
20, we would
of that
loss was due to the
for covering our short
normally
have
fact
position.
that
1987
resulted
recent
gapped way
For example, on October
Eurodollar
to
in
computerized
ten
years?
getting
is the
trend-following
that devalues
we may see the day
come
will
change
trading
Are there just too many
in each other's way?
when
longer work?
trend-following
a
is relatedto the
doubt about it. In a perverse sort of way,
of technical trading
over
fundamental
triumph
think
you
I can objectively identify
of false breakouts
prevalence
perversebecauseit is a victory
Do
out as fast as possible in
in big trouble.
people
it represents
I say
trading.
technical trading.
trend-following
a day when easily discoveredand
systems no longer work. It is going
systems
lightly
to
no
conceived
be harder
to
develop good systems.
the market
been out of our short
factor
only
your
getting
is no
ultimate
of
false breakouts.
during the past five
the same thing,
doing
the
do you still get out
losses you suffered were dueto any
sharp
more
toward
Do you feel the
There
The shortsideof the interest rate markets in October
there?
went
in one of your worstlosses.What
wrong
past
the
you
That's hard to say. The
Yes, there
faster
of line,
any
have
in the
tendency
out
like that, then
tremendousincrease
point.
same.
109
position
about 40 to 50 points higher, but the market opened 240 points higher
We blew 190 points in a skid that was absolutely unavoidable.
that
day.
Given
the
can
that,
same
the approaches
you were using beforestillwork with
efficacy?
Actually, I believethat
the fact that
your
advantage.
there
if you view the
problem correctly,you can make
are many other trend
followers
in the market work to
I can't
get too specificabout
the
solution,
because
if we
Richard Dennis
110
are
have
always
is pretty valuable information.
To
to be one step ahead of everyone
else.
that
right,
be successful
like you started working on this problemwell
problems began in late 1987.
performance
That's right.
the
During
bandwagon-effect
have been thinking
about
did
When
you
virtual
We
for a long time. Half the work in
right way to conceptualize it. It took us
right questions to ask.
this problem
solving a problem is finding
out
years before we figured
the
the
arrive at what you considered a satisfactory
finally
Yes,
right around the time we closeddown
the
as short
is being
secret
on
your
trading
the vast majority
of trend
depending
like
or as long term as you
term
style.
It
followers.
is the
can
I also avoidthe emotional
elation when things
is no way to play just one side of that
If
street.
is that
side
The
the plague.
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?
for there not
in the
possible.
results.
to
be.
It is totally
counterproductive
Trading decisions should be made
to get
wrapped
as unemotionally
crazy,
as
after
but
or you
twenty
done it for
you've
learn to put
it into
put
Every
now and then,
the
wallop. After
years
you get a bit
punch-drunk.
Is there
emotionally
twenty
years,
perspective.
it into
perspective, but
time. Being a trader
over
is like being a boxer:
twenty
will
you
I realized
years?
Not necessarily [he laughs]. It gets easierto
has shock absorbers that deteriorate
everyone
stand,
term that picks up
best strategy is to avoid the
intermediate
trap?
are going well. There
are going well, then
you feel too good when
things
inevitably
feel too bad when they are going poorly. I wouldn't claimthat
market
gives you a good
any advice you can give to other traders on how to stay
calm
during
periods of trading losses?
bit like playing
You can throw your
clubs
around
after
golf:
a
bad
but
next
while
are
the
shot
should
shot,
making
making
you
you
keep your head down and your eye on the ball.
It
up
but the flip
Does it become easier after
funds.
public
I know you can't bespecific,but does your solution to false breakouts
far more short-term
involve
oriented, so that you can respond
being
more quickly to those situations?
I try
are able to avoid the emotional
it either drives you
Ironically,
middle
So you
that after three years of trading,
solution?
The
in what
it is misleading
approaches.
trend-following
using
to me,
trading. Also,
your
your perspective. Thereis more to life than
mean
being emotionally deflatedwould
lacking
I am doing. I avoid that because
I have always felt that
to focus on short-term
results.
to maintain
have
confidence
ten years, there has been a
past
of people
before
111
Yes, but how do you do that?
you
You
It sounds
Dennis
Richard
is a little
Do you
and
I have mental
Trading to
scenarios about economicgrowth,
use long-term
the dollar
me
in
your
making
but I try
pictures,
is like
think are loaded a
betting
on
little
bit
not
to use
independent
in your
inflation,
decisions?
trading
them when
roles
I'm
of the
favor, because you
trading.
dice
that
know
you
some
RichardDennis
112
to be
Long-term scenarios can prove
on balance,
I'm not convinced
much difference over the term of any individual trade.
statistical things
right or wrong,
that
make
they
basic
I would
if they are right,
even
Even if you think
your
the market.
about
but
dollar
the
is going to collapse, that doesn't affect
pattern?
trading
to say it doesn't,
like
it should,
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
is all wrong
risk/reward
for my type
means
and
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.
think,
wakes
everybody
up\342\200\224
like having termites in
It is
the
them until one day they
I don't think
collapses.
anybody
notice
the
fact
foundation
of your house. You may
that things appear to be holding
together.
and couldinfluence
I bet
Sure. I think
will be at record levels of inflation
we
What is going to be the
It
going
and
higher
require
recession. The
as investors
budget
of
real
levels
interest
rates
to buy the debt. The
higher
the economy,
try to avoid the recession
by stimulating
will
government
a tactic which
to
to be caused by the
essentially
In other words, fear of
avoid
a recession
will cause
It
a very Republican
like it or not, the financial
is,
Whether
it is right.
unfortunately,
idea, but
I think
you
markets
are in conservative
hands. Peoplewho
buy
tremendous monetary
will lead to inflation?
easing,
turn
deficit
work.
doesn't
in
which
a deep
federal
monetary
lend
money
to the government and businesswill
easing as a solution to a recession.
change,
change?
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
the
force behind that inflation?
driving
to be driven by trying
is going
recession is
by the end of 1990.[This
in mid-1988.]
conducted
was
not
chunk and the house
gnaw
away
a
take
should
large amount of comfort
a big
if you were President
Hypothetically,
the deficit be the first
would
thing
you would
interview
it
you are saying that people lookat the deficit
year after year and
it
is
can't
be
so
the
\"Well,
bad,
economy strong,\"and one day
And
that caveat, as a long-time
market
what
observer,
major trends do you see shaping
up over the coming years?
Acknowledging
which
won't
in
of trading.
bomb,
shatter the economy?
Sure. We
but it
in the past.
probablyhas
Are you implying that the deficit problem isjust a time
will eventually
certainly
and I don't think
113
Dennis
Richard
not
it is especially
first ones to pick up the
I don'tthink
economic
Keynes
ever
banner
proposed
using deficit spending in
strong
times.
to be
that were supposed
No, that's true. He proposedsurpluses
to deficits.
The
Surpluses in good times; deficitsin bad times.
countercyclical
because
of the lack
trouble is that we have only one side of that equation
will
to create the surpluses when
times
are good.
of political
So what
to
do
is
economics
is
we really
admit
that
ought
just an
Keynesian
We
to
excuse for
and
easy money, overspending,
overconsuming.
ought
and
the
admit
that
the
whole
is
a
debt
of
government
concept
just
junkie
deficit spending
is flawed
in practice.
Richard Dennis
114
mean
You
as it is
Keynesianism
being applied, not
doesn't work
is fine, it just
theory
it.
use
shouldn't
because you
have
in the
Besides,
the exact
that
you
feel fits the times and makes
sense?
some
its
get rid of deficit spending.We
to
have
We
way, and the federal government
just as the states do. At that point,
orderly
budget
for a constant
supply
money
a good
probablybe
adjusted by a growth
in
your
return.
compounded
the
equity
peak
You
are
rumored
to retire
would
factor
that's
could
give the
when you are as bad as you
Don't be misled by the
mistakes.
equity.
not
on the
random nature
After
Dennis
announced
full time,
an aide who
took
with Dennis'
worth $3,833 when the accounts
a 25 percent annual
been
to approximately
The figure would have been more
about one year earlier.]
to have lost a very
substantial
I lost about
10 percent
of the money I had
measuredas a percentage
charitable
of my
because
portion
these
figure
over
that at
of your own
stories
in the markets.
made
of my net worth,
the
and political contributions
Did your poor trading resultsduring
double
than
net worth during your final year of trading. Are
or exaggerated?
Focus on whether
of any
what
single trade's
you
novice trader?
are
ever
It
made
true
Of course,
is much higher
the years.
year speed your career
the
past
are
you still trading
no difference.
going to
Have you really gone coldturkey,
is right,
I am
his retirement
I called with
some
or
lightly?
day-to-day
are doing
not
outcome.
at all.
trading
Richard Dennisis one
political
interests
have
transitions?
What isthe most important advice you
fluctuations
the deficit in
should
have to balance
Milton Friedman's proposal
need
idea.
Trade small because
be. Learn from your
Each $1,000 invested would
were closed. [This works out
opposite problem.
Is there an economic
theory
in your
invested
fared
real world. Therefore, we
to the
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
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
as he himself purported it?
economics
115
Richard Dennis
from trading
to pursue
follow-up
questions.
his
I spoke to
he called
down the questions. Several days later,
follow.
replies. These questionsand answers
commodity traders of our time.
visualize
long
implementing
large
you might
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 type
if anything,
of
of the
legendary
trader
to contribute to his trading
success.
Richard Dennis
116
Dennis believesthat
is to miss
a major
worst mistakes a trader can make
to his own estimate,
profit opportunity.
According
have
come
from
5
profits
only
percent of his trades.
one
of the
95 percent
of his
Missingonly a few such profit opportunities could have a dramatic
on performance.
negative impact
too
holding
rigid
As a corollary, you
need
an opinion on a market, since such
to guard
an
against
could
opinion
One particularly
the
times
when
periods\342\200\224are
useful
piece
you least want
precisely
the times
of advice
to
Tudor
Paul
easily lead to missing a major trend.
think
when you
offered by Dennis is that
about
need
trading\342\200\224the
to focus
The
Art
losing
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
Jones
invested in this fund was worth $17,482, while
the total amount
of money he managed
had
to
million.
In
$330
fact, the amount
grown
under management
would have been higher,
but Jones
stopped
new
investment
funds in October 1987 and has also made
cash
accepting
$1,000
since
disbursements
that
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 compendium
as a trader
of contrasts.
he shouts
relaxed,
but
sergeant.
His public image is one of
dramatizes
Mansion,
is easygoing
he
one-on-one
the flamboyant
private
has also
In private conversation he is
with the ferocity of a drill
a swaggering,
egotistical
trader, but
and unassuming.
The media
usually
elements of his lifestyle\342\200\224Chesapeake
3,000-acre
he
restaurants\342\200\224but
orders
his
wildlife
preserve,
made helping
the
Bay
fine
women,
a second avocation.
beautiful
poor
Jones has emulated
New
York businessman
Eugene Lang by
education
of eighty-five elementary
setting up a fund to finance the
college
school graduates
in Brooklyn's
economically
depressed Bedfordsection.
This is not merely a matter
of donating
Stuyvesant
money; Jones
has become personally
involved
by meeting with his adopted students
weekly.
More
recently,
he started the
Robin
Hood
Foundation,
whose
endowment has grown
to $5 million. This organization, true
to its name,
raises money from the rich and distributes it to private groups and
individuals
to aid the poor.
working
Joneshad arranged
our interview for 3:15 P.M.,a time by which all
the futures
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.
markets
are closed,
119
Paul Tudor 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
300
(\"Buy
This
the
at even!
between
trading
180-degree
shift
extreme
flexibility
in opinion
a short
within
that underlies
Jones' trading
time span exemplified
success.
He not only
quickly abandoned his original position,but was willing to join the other
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
a second
major
selling wave in
the
a type
up New York Stock Exchangeofficials
the price collapse.
positions during
who
being
October
1987\342\200\224could
Carthyism. Indeed, there
During
the
Senate
so desperateto find
dragged
is
lead
historical
hearings
held in the
villains
responsible
stock
market\342\200\224the
of financial Mcfor
such concern:
precedence
members
were
committee
1930s,
for the 1929 stock crash that they
to
first
had held
long
Paul Tudor
120
feared
Jones
that, as a prominent
economic trends, he might
witch-hunts.
governmental
make
and
speculator
a convenient
forecaster
target for any
Jones had been particularly
Jones
rattled
of
by a call
specific.
Jones remained
the directness
of the first
friendly,
an
almost
in
his replies. For
replaced
by
prerecordedquality
a
about
met
was
with
a
about
example, question
trading
strategy
response
in
broker
places his own order
front-nmmng^-an illegal practice which a
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
Although
interview
in
was
some
hypothetical
future congressional
was being overly cautious\342\200\224if
expectation that
hearing. I thought
that
then
the
paranoid\342\200\224but
economic crisis would
does
not really seem that
a true
of bad news\"
not
lead
to \"killing
again,
Howcomeyou
Jones
the messengers
far-fetched.
my uncle
Because
did you first
get interested in 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
I was in
Exchange.
college
I read
was primarily
in the
involved
uncle?
cash side of the
interested in
I was
cotton.
merchandising
business,
a trader
becoming
straightaway.
How long did you
work
on the
floor of the exchange?What
was
your
job there?
I was a floor clerk; that is how everybody begins.But I also did a lot of
out what made it
the market to try to figure
analytical work, watching
then returned to
and
months
six
about
in
York
for
New
I
clerked
tick.
Eli.
work
for
to
New Orleans
Did you learn a lot
about
trading
Absolutely. Working
with
Eli was a fabulous
position
was only
off the
He
floor.
He was a true sight
was a pure
his own
from
broker
So everyone
apparently,
easy
to tag.
head
on.\"
knew his hand?
it didn't
hurt
trade
open interest
cotton
trader
speculating?
was
thing
speculator. The amazing
knew
on the floor, everyone always
Definitely.
No.
experience. He would
to behold.
futures against cashorjust
position was. Hewas very
it, I'm going to take them
But,
Eli?
market
the entire
sizes of 3,000 contractswhen
He would trade more volume than
any
30,000.
Was he trading
When
for Eli instead of your
to work
went
future
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
anything
121
Paul Tudor Jones
him?
Eli's attitude
that since he used
exactly
was,
what
his
\"The hell with
Paul Tudor Jones
122
Is that
an
Do you try
exception?
to
hide
your
Paul Tudor
that I won't have to worry
positions?
point
I try.
the guys in the pit who have been there for five
realistically,
know
it
is
me.
years
Everyoneknowswhen I trade. The one thing
But,
or ten
I learned
from Eli is that,
is going
to go.
So you don't think
the market
ultimately,
it is
is going to go where it
to hide your positions?
important
important
lessons
By watching
Eli,
else did you learn from
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
and downs involved.
a general
specifics
regarding
trading?
character-building lesson. What
about
Tullis taught me about moving volume. When you are trading size, you
have to get out when the market lets you out, not when you want to get
out. He taught
if you want
a large position, you
don't
or
low
because
ground
high
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
wait
me
that
until the market is in
high was at 56.80,
at 56.85. If the market
old
to move
new
to be a lot of buy
there are probably
going
stops
is trading 70 aid, 75 offered,the whole
trading
thJ market, touching off those stops,
ring has a vested interest in buying
and
into the stops\342\200\224that is a very common ring practice.
As
liquidating
an upstairs trader, I put that together with what Eli taught
me. If I want
to cover a positionin
that
type
markets
look
their very best
He
You have done tensof thousands
of trades.
Is there any single trade
out?
stands
the most from mistakes, not
Yes, the 1979 cotton market. Onelearns
accounts
I was a broker back then. We had lots of speculative
successes.
of July cotton. The market had been
and I was long about 400 contracts
a range
in
trading
time it came
like
that even though
is often the best time to sell.
are setting new highs, that
they
to some extent, to be a goodtrader,
in me the idea that,
you have
One
sounds
I learned
to Tullis?
Tullis?
He was
That
you can attribute
to be a contrarian.
that
What
new
other
Any
when
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
at the
out of the entire position
about
getting
are being hit. I will always liquidate half my
half beyond that point.
highs or lows and the remaining
the stops
where
position below
instilled
I think
123
Jones
of situation, I will
liquidate
half
at 75, so
immediately
down
between 82 and 86 cents, and
to the low end of that range.
I was
day, the market broke to new lows, took out the
about
30 or 40 points. I thought
rebounded
buying
stops,
the
it every
and
reason
the
so poorly
was because of the price vulnerability
market had been acting
of those well-known
stops. Now that the stops
implied by the proximity
was ready to rally.
the market
had been touched off, I thought
I
the ring at the time. In an act of bravado,
I was standing
outside
told my floor broker to bid 82.90 for 100 July, which at the time was a
the Refco broker
He bid 90 for 100, and I remember
big order.
very
\"Sold!\"
owned most of
the
Refco
across
came running
pit screaming,
stock at that time [the type of cotton availablefor delivery
the certificated
I realized that they intended to deliver
the contract]. In an instant
against
at about
a 4-cent
which then was trading
against the July contract,
me
the whole
It
also
on
that
contract.
dawned
October
to
the
premium
congestion pattern that had formed between 82 and 86 centswas going
82
move down [the break from
to be a market measurement for the next
of the prior 4-cent trading
cents was going to equal the width
range].
124
Paul Tudor Jones
So you
knew
you
were wrong
immediately?
Paul Tudor
Jones
70 percent
of their
I saw immediately
Did that
and that
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
Soyou
No,
realized
I realized
How fast
that you wanted to be
instantly
you
in the
the
Refco
looked
broker shouted,
\"Sold,\"
at me, because they
then telling
broker
my
down
in sixty
When
did
around,
seconds,
walking
to sell as much
I was
and
the
locked
selling
some
the position
Even though
was no good.
you
retrospect,
reacted
should
First of all, never play
trade,
equityin
and I started
about
150 contracts
before the
opening bell. I sold only
limit-down
the
time
all
I
it
was
over, ended up
again. By
contracts as much as 4 cents
below
the point I first
knew
what
overtrade.
lower
macho
My
major
problem
but that I was trading
the accounts
fairly quickly,
you have done?
man
far
you still took a big hit. In
with the market. Second,never
was not
of points I lost on the
contracts relative to the
accounts
lost something
like 60 to
the
too many
that I handled. My
number
terms
up to that
successful
been
in the
been
business at that time?
and a half years.
point?
had made money, and I was an
Relatively.Most of my clients
producer
How about someonewho
the
important
for my company.
So everyone
had
given
you $10,000
at the beginning of
period?
three-year
They were probably up
position?
your
your whole trading style in
change
I
of water,
and
out, getting a drink
as he could. The market was limit-
The next morning the market opened 100points
selling from
what
only able to sell 220 contracts.
you get out of the rest of
market
knew
single trade.
quit.
three
about
Had you
everyone
ring
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
I nearly
Only
and
around
turned
trade
particular
How many years had you
react?
Almost immediately. When
in that
equity
I said, \"I am not cut out for this
demoralized.
Absolutely. I was totally
I was so depressed
much
I
hack
it
can
I
think
don't
longer.\"
business;
that
that I wanted to be short.
instantly
did
out.
125
about
who was with
threefold.
you
for
a long time was still ahead of
the
game?
Yes, but I had to suffer some intensedrawdowns
during
the interim.
for me. It was at that
cotton trade was almost the deal-breaker
risk
I said, \"Mr. Stupid,
everything on one trade? Why
why
point
not
That
that
make
than
pain?\"
your life a pursuit of happinessrather
I first decided I had to learn discipline and money
That was when
management. It was a cathartic experience for me, in the sense that I
I was
edge, questioned my very ability
I was determined
not going to quit.
decided
that I was going to become very
went
to the
about my trading.
and decided that
to come back and fight. I
as a trader,
disciplined
and
businesslike
126
Paul
Did your trading style
that point on?
from
radically
change
Tudor Jones
One aspectof your
Yes.Now
my day trying to make myself as happy
I spend
positions
are going for me, I keep
I guess
you not only
Quickerand
more
trading
out;
if they
about
losing
with
a close
stopped out. On a singletrade
pick a turning point before you
then, in that cotton trade, I had a
about all the money
I was
I didn't
think about what
I could
lose.
I keep
poorly,
reducing
smallest
position
size
I thought
What
the
are
Don'tever
Do you always know where you
are
on?
a mental
out before you put a trade
getting
stop. If it hits that
do you risk on any
I don't
break it down
interrelated. I
look
number,
I am
poorly;
trade in
situations
If you
not walk in
\"I am
and
say,
more
single
than I started. Tomorrowmorning
short the
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 the
never have a double-digit
how
give
fundamentally.
losing
times
many
will you try
to
up?
Otherwise, I will keep
When I am trading
trades.
I will
cutting
be trading my
rest
of the
loss
in any
month. I want
month.
to make
sure that I
rules you live by?
losers.
Decrease
increase
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
trade?
morning. My
with
and
not trading.
gambling,
out no matter what.
trade by trade. All the trades I have on are
at it in terms of what
is each
my equity
is to finish each day
buy
volume
when you are
your trading
are
well. Never
when
volume
trading
you
your
I don't
For
have
don't
control.
where
example,
you
is
of money in front of key reports, sincethat
amounts
average
trading
solution
much
How
idea,
my position size. That way,
when my trading is worst.
trading
risk significant
have
mind,
my position size down as I have
money
to
Back
money.
going to make on 400 contracts.
I
style is a contrarian attempt
Let's
Until I change my
but also quicker?
smaller,
I am always thinking
defensive.
of July going to 89 cents and
vision
me, I get right
against
relaxed
them.
started
as opposed to making
going
and
trading
say you are looking for a top and go short
points.
market reaches a new high.You then get
when
the
stop
sell turning
as I can be. If I have
127
Paul Tudor Jones
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
a game plan for getting
I have
out.
be a hero. Don't have an ego. Always
Don't
Don't
your ability.
you
ever
feel that you are very
yourself
question
good.
and
you do,
second
The
Jesse Livermore, one of the greatest
said
that, in the long run,
you can't
reportedly
was a devastating
quote
the
into
is a frightening
markets
confident now
than
I am
your
scared
sense of confidence, but
Aren't
for years.
successful
more
you
you were before?
now than I was at
any
point
since I began trading,
something.
until
you finally
hit it?
a premier market opportunist.
means
I
That
myself
an
idea
on
the
and
a
market
it
from
develop
pursue
very-low-risk
I have repeatedly been proven wrong,
or until I change
until
standpoint
my viewpoint.
your decision-making process that
allows
you
market
near
What
is it about
so close
to the
of all markets.
I also
to get in
turns?
very
strong
views of the
long-run
direction
short-term horizon for pain. As a result, frequently,
I may
trades from the long side overa period of weeks
in a market
repeated
try
continues
to move lower.
which
a very
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 that
is certainly
been a swing
trader,
part of it. The other part is that I have always
that I believe the very best money is to be
meaning
a lot of bottoms and tops.
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
the
time
they
move sideways.
What is the most prominent fallacy
in the
public's
perception
about
markets?
My impression is that you often implement
positions
turns. Sometimes your precisionhasbeenuncanny.
have
of doing a seriesof probes
Exactly.I consider
in
how ephemeral success canbe in this business.
I know
I have to be frightened.
that
to be successful,
have
hits
My biggest
after I have had a greatperiod and I started
come
to think that I
always
I have
Is it a matter
made at the market turns. Everyone says you get killed trying to pick
tops and bottoms and you make all the money by catching the trends in
the middle. Well, for twelve years, I have often been missing the meat
it in check.
keep
I recognize
knew
129
Jones
prospect.
If you make
defense.
guiding
philosophy is playing
great
think
it
is
have
don't
because you
some uncanny foresight.
But you have beenvery
more
markets. That
my
maintain
Always
of all time,
speculators
ever win trading
like me, just getting
for someone
that you can't beat the
idea
The
That is why
a goodtrade,
because
Paul Tudor
dead.
are
business.
Jones
That there is some group
on Wall
markets. I can go into any market
and create a stir for a day or two, maybe evena week.If I go into a market
I can create
the right moment, by giving
at just
it a little gas on the upside,
of a bull market. But,
the
illusion
unless
the market is really sound, the
I stop buying, the price
is going to come right
down.
second
You can
That
can
markets
be manipulated.
Street that controls price action
open the
a wonderful
to buy
the
most
beautiful
summer
clothes,
Saks
in the
Fifth
Avenue
in Anchorage,
menswear department, but
you will go broke.
unless
Alaska,
somebody
with
wants
130
other misconceptions do peoplehave
What
the
about
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
a point
to fade a winner?
wants
of talking
markets?
something.
Any
My
Week\" and she
I would
bet that
I want
major market on an
about
being on the
to be with
to the people who have the
best
them
because
track
records.
I make
How do you keep all theseother opinions
from
confusing
your own
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
I had
last Wednesday,
give you a perfect example.Until
in
advance.
The
been bearish crude oil, while it was the midst of a $2
I wait.
I will
on
best
oil trader I know
crude
was bullish,
was
bullish
went short. Then the
I never
Are
Marty
he
that period. Becausehe
to stall and one
started
I knew that instant\342\200\224
here.\"
market
\"I think
said,
any market
there
Zweig
Prechter is the
advisors that you pay attention to?
and
Ned Davis
best
because
are great; BobPrechter
he is the
advisor
you
Ned
Davis
I think
seen. Although
underrated?
consider
does the best researchon
he is well
ultimate
market
is the
champion.
opportunist.
What do you mean by opportunist?
Any analysts
Judge not,
Very few traders have
makes
you
I think
one
reached
What
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 loyalty
to
is obviously
positions
an important element in
your
trading.
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 is important
because
figure out what
is really
completely
clean
slate
it gives
market.
Has the tremendousgrowth
it
more
difficult
to trade
of
Without
think
you
could
return if you
were
trading
question.
the
money
at the samelevel
approach.
been so successfulis that
of achievement.
different?
make
to create
level
your
Do you
he has
one
that I have
the
you be judged.
least
Wave theory
the Elliott
incredibly favorable risk/reward opportunities.That
Wave
is the same reason I attribute
a lot of my own success to the Elliott
reason
market
received
you consider overrated?
more
allows
stock
he has
deserves.
recognition he
It has made it tremendously
The
the
known, I don't think
during
I am going to go flat
news was coming out of OPEC
particularly,
given the fact that bullish
right at that time\342\200\224that crude oil was a low-risk short.I sold the hell out
of it, and it turned out to be a great trade.
day
131
Paul Tudor Jones
every
virtually
almost daily basis. Are you uncomfortable
oppositeside
of the fence from these people?
Who
Jones
Week.\"
Street
I know you talk to traders in
Yes.
Tudor
Paul
you are managing made
of profitability?
difficult.
a substantially higher percentage
smaller amounts of money?
Paul Tudor Jones
132
Do you
ever
the detrimental
whether
question
outweighs profit
performance
fees
incentive
impact of size
you
earn
on your
from
a major stock market
since mid-1986
collapse
of
because
the
plans drawn
up
possibility we
for a financial
meltdown. When we came in on Monday,
was going to crash that day.
19, we knew that the market
foresaw
October
about that
what happens
Have you
by
every
question
time
the
day. It is going to be interesting
to
see
your book is published.
accepting
stopped
new investment
time
funds?
exact same thing
compare the relative
jobs?
advantages
and
manager.
disadvantages
How do you
of these two
brokerage business becauseI felt there was a gross
If you are charging a clientcommissionsand he loses
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
out
conflict
of
Do
of the
interest:
you
keep your
I would say that
primarily
because
get
my
percent
I believe
own
funds?
I am
and
in my own funds,
world
for it. I
conservative
that I
the
You did extraordinarily well during October1987,a month
Could you fill in some
traders.
other
was a disaster for many
which
of the
details?
The week of the crash
my
life.
happened
downside.
two days before the crash. Our
in 1929,
[Paul Jones'
Peter Borish,
the
1980s market over the
1920s
market.
The two markets
superimposed
demonstrateda remarkable
of correlation.
This model wasa key
degree
in Jones'
tool
stock index trading
1987.]
during
Treasury
Secretary
Baker's weekendstatement
that
the U.S. would no longer support
the
dollar because of its disagreements
with West Germany was the kiss of
death for the market.
his
collapse
perfectly
research
director,
nailed.
did you cover your short position?
When
We
actually
the
day
covered
of the
most
our shorts and went
somewhat
long
on the close of
crash itself [October19].
of your
profits
in
October
due
to your
short stock index
position?
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,
for
situation
was one of the most excitingperiodsof
was a record volume day on the
analogmodel,developedby
Were
is invested
of my net worth
is the safest place in
that
going to be so defensive
back.
money
really believethat
will
85
money in your
Friday
to 1929 had the
model
analog
a money
you so sure?
Becausethe previous
ago.
been both a broker and
You have
expecting
made
What
The
Yes, a long
been
had
We
and had contingency
money?
managing
I think
133
Paul Tudor Jones
me.
is the Fed reaction going to be? I thought
What
would have to add massive amounts
of liquidity
to create a very
I kept on thinking:
that
thev
Paul
134
rosy environment,
instantaneously.
all day,
acting poorly
I couldn't bring
bond position. During
the
However,
since bonds had been
myself
to pull the trigger on a long
half hour
last
Tudor Jones
of trading,
bonds
1987 was an early warning
faces
the
financial
friends.
Everything
gets
see any
in which
way
we can solve our current problems
beforewe go into a deep recession, or even
signal
to
That
is what scares me so much.
current
dilemma.
depression?
of
a hundred times faster than it is built up.
have taken ten years
that might
down
one day to tear
something
It takes
of
kind
the
with
leverage that is in
to build. If the economy starts to go
will
heads
spin. I hate to believe
it, it will deteriorate so fast that people's
in my gut that is what I think is going to happen.
it, but
I know from studying history that credit eventually kills all great
societies.We have essentially taken out our American Expresscard and
the
made sure that
time.
Reagan
we are going to have a great
said
our
in
office
his
term
way
borrowing
be
by
would
great during
economy
the future, and soon we will have
into prosperity. We borrowed
against
destroyed
to pay.
I don't
see any blueprint out of our
there are macroeconomic forces at work that are
over. Perhaps
cycle that we don't have any control
Maybe
part of a larger
we are simply
community,
of my
Do you
135
As
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
Jones
suddenly
started to turn up, and it clicked in my mind that the Fed was going
a tremendous
create
upsurge in bond prices.
take actions that would
wild.
a
for
act
moment, I went
bond
market
I
the
soon as saw
right
Do you believe that October
more negative times ahead?
Paul Tudor
super
to the same type of cyclesthat most advanced
responding
fell prey to, whether it was the Romans, sixteenth-century
civilizations
Spain, eighteenth-century France,or nineteenth-century
for a period of pain. We
what
financial
is all about.
discipline
Do you
We
use
tested
have
systems
trading
found
one
obvious
reasons,
that
every
system under the
sharply
sun
and,
to relearn
going
into:
but for
system,
trend following?
contrarian?
basic premise of the system
If there is a suddenrange
move.
they
we have
amazingly,
actually works well. It is a very good
I can't tell you much
more about it.
The
when
are
at all?
What type of realm doesit fall
Trend following.
I think
Britain.
that we are going to be in
is that
expansion
markets move
in a market
nature
is to try to fade that price
narrowly, human
the market is sending you
you get a range
a
expansion,
the market
is getting ready to move in the
very loud, clear signal that
direction
of that expansion.
that
has
been
trading
move.
When
Are you
trading
a portion
of your funds on that systemat the
present
time?
Are you blaming the current situation
I think Reagan madeus feel
good
in terms
I think
he
Reaganomics?
We just started trading
as a country\342\200\224and
of economics, he was the
us by
hoodwinked
basically
but,
on
biggest
that
disaster
is wonderful\342\200\224
system
about six months
ago, and so far
it is
that ever struck.
the deficit, and
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
promising
to cut
doing
the
very well.
Do you
feel
a good
system can compete with
A good system may be able to trade more markets
trader because it has the advantage of unlimited
a good
trader?
effectively
computing
than
a good
power.
After
Paul Tudor
136
all,
trade decision is the
every
defining
usually
otherwise.
or
process\342\200\224human
of
product
some
market
patterns,
interacting and changing
be able to outperform a goodsystem.
in
complexity
a good trader
Unequivocally.
move as I will,
can
will
Twenty
months;
it is fifty-five
the
A
good
during
diversify?
help
today
but
same,
of the
is in
price
a major
The following sectionof the
the interim,
market from
Jones
was conducted
interview
had
two
weeks
later.
on the
stock
reversed
his trading
bearish.
What made you change your
bias
to bullish.
bearish
Two weeks ago you
ten
years?
of credit will
delay
the
process
relative to the
preliminary
make it sound
comments
before the start of our
like you are paranoidbecause
of your
success.
be that
misery in this country
gets
we did well as a
trading
because
we
were
very
mind?
world that
The first
that prices
I was
thing
the
Wall
Street
Journal
article that
move first
Do you mean that
and
if you
fundamentals
come second.
were right,
prices should have
the perception is going to
while
similar to a number of other traders
I have
a group of apprenticetraders.What
that,
have
you
trained
go down.
believe
gone
down
of time.
When
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
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
becauseof the much
break.
stock
market
we
are diverging
easier availability
from the 1929 modelis
of credit today.
Volvo
was
motivation?
to the
publicized
didn't
short 2,000 S&P contracts?The market
I
the
railroad
tracks.
I do is put my ear to
always
enough,
had some
I understand
your
mean besides
deep
other people were hurt,
firm,
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.
interviewed,
and;they
Who owns a carfor
we had a cash economy.
when
interview today
that!
of a car loan was twenty-four
length
I think the final
months.
bottom
line will be
Someof your
will catch ten times as much
system
the 15 percent of the time a market
If the
You
the ease
about
phase.
trending
During
137
car loans.Think
years ago, the average
1920s,
But a goodsystem
Jones
out 120-month
problem-solving
because of the
However,
Paul Tudor
Jones
is giving
How many
We
have
traders
have
you hired?
About
thirty-five.
Have
they been successful?
Some have
done
very
been deluged by applicants.
well, but overall we have
had
mixed
success.
Paul Tudor Jones
138
Doyou
is because
that
believe
it
to be a good trader?
talent
takes
Paul Tudor Jones
most
the
is
What
139
advice you could give
important
the
average
trader?
I
never
about the ability
of other
Was your I Have
sponsorthe
inspired by the \"60
I went
Right.
in
show
about
Eugene Lang?
week
after
sticken
area,
three
the show, and within
I have always beena big believer
me on about the program was
own program.
thing that really turned
for its multiplicative impact. By helping one kid,you
potential
have
a poverty
The
leverage.
the
of kids from
to talk to him the
we had set up
months
Minutes\"
our
in which you have pledged to
Program,
of a group
education
particularly
optimistic,
to succeed.
people
a Dream
that now. One of
to believe
starting
is that I always tend to be too
weaknesses
my
but I am
that before,
thought
an impact on his family
and
We have also recentlyset up
other
kids.
a new
program
can
Do you still see yourself trading ten
I wouldn't
have
Robin
Hood
who are on the
to seek out and fund
We are trying
people
food and shelter to the poor. We are seeking out
in providing
frontlines
no budget at all, rather
with
who are used to working
virtually
the people
do
not
often
which
than
the bureaucracies,
deploy the money effective-
Foundation.
to
your
so good to me that I feel I should
I can't say that I have been successful
in return.
give back something
in the
else.
I am better than anybody
because
By the grace of God, I was
to share.
obligation
right place at the right time, so I feel a tremendous
Is the positive intensity
is nothing
There
similar experiencein
combination
of
winning
of winning
alive. Trading
as the pain of losing?
a bad
and losing days any
gives you
is all about. Emotionally, you
more
as strong
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,
worse than
difficult to hold your
been
have
time
because
you feel that
intense
feeling of what
an
incredibly
live
on the extremes.
much
life
cotton
gut-wrenching
his start in
It took
the
business,
a traumatic
but, in the
trading
into
his
trade in 1979, Jones has managed
excellent
Hementally
the
No matter
market.
single
assures
trading
to
instantaneously
positions
how large a profit
he
his entry price was the previous
that there is never a cushion
mind
Jones'
about
but
portfolio in real-time.
I would say so. The markets
down the road?
net profitability,
while
his risk way down.
bringing
risk control is the essence
of Jones' trading style and
Today,
success.
He never
thinks about what
he might
make on a given trade,but
on what he could lose.
only
marks
each of his
to
gets complacent
of each position,
life?
years
the importance of risk control
forge
permanently
mind. Since that
approach
Has this become a major part of
from
trader
early years, his performancewas volatile.
experience
fifteen
other way.
Paul Jones was a winning
to maintain
called the
it any
or
have in a position, in
may
night's
close.
Since this
trades, Jones never
watches
the risk
only
in his
any of his positions. He not
he closely monitors the performance
of his
If his total equity
1
2
to
drops
percent
during
well liquidate
all of his positions
session, he might
cut his risk. \"It is always
easier to get back in than
out,\" he says.
If Jones'trading
entire
starts
going
poorly,
he will
continually
a
to get
reduce
his
position size until he is on track 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
winning
registers
streaks,
a double-digit
In short, Jones maintains
he puts it, \"The most important
great offense.\"
loss in
a single
month.
After big
cautious about getting
overconfident.
risk control
in a dozen different
As
ways.
rule in trading
is: Play great defense, not
he is particularly
Bielfeldt
Gary
in
Peoria
Yes, They Do TradeT-Bonds
years, I have heard the
in the futures
markets,
players
For
futures
I assumed
market.
name
BLH
as one of the major
T-bonds, the world's largest
mentioned
particularly
BLH was a huge
trading
corporation,
but in
best traders, I discoveredthat BLH was
Gary Bielfeldt.
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
the
seeking out
basically
staggering
a single
country's
individual:
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
independent
any
become
a professional
funds, could develop a sufficient
desire
trader. Bielfeldt's strong
base
capital
to make
to
this leap in
risk.
base prompted him to take a large, if not imprudent,
his
initial
built
$1,000
up
By 1965, Bielfeldt had painstakingly
of the soybean
evaluation
stake to $10,000. Based on his fundamental
his
capital
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
soybeans.)
The 1983 soybean loss may
happened
to Bielfeldt.
bottom in that
have
been
the best thing
His shift to T-bonds coincidedwith
market.
T-bond position at the
He became very bullish
right time. When the
and
T-bond
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,
143
Gary Bielfeldt
in the same league as the
trader
tures
most
prominent
institutional
market
participants.
Bielfeldtcould not
further
be
removed
from the
popular
image
of
a large-scale trader in the
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
his home town.
I interviewed Bielfeldtin his
The huge, wraparound
screens. Despitethis
large,
configuration
furnished office.
comfortably
flanked
was
by ten quote
of electronics, Bielfeldt was low keyed.
glanced at the screens during the afternoon I spent in his
it is hard to visualize him
at any time, the
trading
frantically
He rarely
office,
desk
and
vast
array
vast array of quote machines 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
discussing
the
me to turn
reasons
off my
for his net trading
losses
tape recorder. I could hardly
in a given
year, he asked
what he might
measure. The off-the-record
far from shocking. It turned
comments
out that his trading
proved
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
necessitated
this
precautionary
imagine
144
Gary
However, I found
of material.
character so strong
that
compromise,I weighted
story
so compelling
easy
this
side
and his
way
and limited
the
basic approach
What
I always
in
system
and
analyzing
trading
the markets?
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
wrong.
I assume you are referringto
Do you
this
trade
technical
analysis
my own trend-following
I developed
Right.
as a supplement.
system.
system
as a backup to tell me when
primarily
to get out of a
position.
Can you
think
of an
the
start
March
when the bond market
started
to say you are wrong. In this
you
have
the
rationale
for getting
What went wrong with
out
that
of my
primarily because I was
seemed
to be on target until
At some point,
down.
edging
thought
October
that
1987
it
Do you have an opinion about systemssoldto the public?
I
of these systems a few
at some
looked
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
made too many
for
learning
good trading
systems can provide an
approach?
trading
I would advise anyone who developsa system
isn't
should
it with their
half the money on a
to combine
trade
own judgment,
just in case
the
working.
case,
my system
provided me with
losing position.
trade?
Is that the way you trade?
I usedto pay more attention to systems than
focus on my own judgment.
Is that because your own
systems
Basically,
can do when starting
out is to learn how a trend
a
trend
for a while will teach
a new trader
Trading
system
of letting profits run and cutting
losses short. If you can just
market
bond
expectinga weaker economy.Everything
early
systems?
anyone
own judgment. In other words, they
and the other half using
their
system
example?
of 1988,1 was long the
thing
works.
principle
system
At
of trend-following
learn discipline by using a trend-following
system, even temporarily,
will increase your odds of being successful
as a trader.
effective
I use the
opinion
Besides providing a training
vehicle
habits, do you feel that trend-following
in any consistent way?
system
best
The
the
is your
is your
What
out. As a
to a few excerpts.
section
interview
Bielfeldt's
reluctant to take the
to the narrative
chapter
I was
145
Gary Bielfeldt
Bielfeldt
than I had anticipated. I
the economy was a lot stronger
left over from the
factor
there would be a bigger fear
materialized.
stock market crash than
actually
haven't
They haven't
people
using
been
judgment
working
is more
as well as they
I do
now. Basically,
I just
reliable, or because
used
to?
worked as wellas they used to because there are too many
too many people are doing the same thing,
them. Whenever
146
Bielfeldt
Gary
the market will
go
a period
through
of adjustment.
Do you remember
you
the key factors you focus on in fundamentally
What
are
the
T-bond
important
balance, and
the
the
single
inflation
are
elements
most important factor. Four other
expectations, the dollar, the trade
deficit.
budget
You have been trading for over twenty-five
longer
years\342\200\224a much
that
trade
time period than most other traders. Is thereany single
stands out as the most dramatic?
There are quite
out most prominently
stands
that
trades that would
a few
the bond market in
was
When did you start trying
I started trying
to
buy
a bottom
to pick
to pick the
my attempt
but the
one
bottom
of
1984.
and
1983
as dramatic,
qualify
when you finally
got
positioned
at a point where
to get out?
have
didn't
evaluating
market?
The economyis definitely
147
Bielfeldt
Gary
I turned really bullish in May 1984, when they auctioned off five-year
notes at a 13.93yield.I had been involved in banking since 1974,and at
the time, we couldn't find
borrowers for three-year loans
any qualified
at 13 percent.
Yet here were government
notes selling at
five-year
this was at a time
above
that
level.
Moreover,
nearlya full percentage
point
when
of a recession
in Peoria: Unemployment was
we were at the height
20 percent
and the farm crisis was worsening.I felt that
approaching
interest
had probably gone high
rates
From that point on through
enough.
traded
T-bonds
from
the long
side. There is no
1986,1
April
heavily
questionthat that was my best trade and longest trend ever.
are the elements of goodtrading?
What
the bonds?
bonds
when
the
when
putting
were trading
in
the
63-
thing is to have a method
rid of your losers.
The
most
important
winners
and
getting
for
staying
with your
66 area.
How much risk dia you
is equal
So
from
anywhere
Generally
to 32 ticks. A
if you
allow
1-point
move
and
[One point in T-bond futures
is equal to $1,000 per contract.]
try
looked
good
again at another
and it didn't
work,
spot?
Right.
declined into the 50s, I guessyou must
had a few strikes against you before
you finally went long in the
Since
bonds
eventually
place.
Yes, there were several
over
a period
of time.
the longer-term
have
right
you
stay
with a winning
trend? Howdo you
avoid
the
position
temptation
of taking profits prematurely?
Thebest
to learn discipline and patienceis to think through
it on. You need to develop a plan of
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 thoroughly
signal when
objective
losses
do you do to makesure that
to exploit
\\ to Vk points.
tried to pick a spot that
you would bail out
What
on a trade?
changes,
positions.
you should
before
out your
get out of the trade. By having
thought
a strategy for getting
out in case the market trend
for staying in your winning
you greatly increase the potential
and
having
148
Speaking personally, how
Why do most traders lose?
means that they
which
overtrade,
They
have
I judge successby
to be right a lot just to cover
things
commissions.
we
The
most
Second,
is discipline\342\200\224I
important
am
everyone tells you
have a good trade on, you
sure
you have to have patience;if you
with
it. Third, you need courageto
to be able to stay
and courage comesfrom
a willingness
to lose;
you need a strong
that is also relatedto
desire
lose.
adequate
Fourth,
you must have
capitalization.
Fifth,
straightforward,
more about what
fullback
except
you
is running
judge
major
for the
would
will
in
that you just fund, or do you
have
a hands-on
it?
running
mean
consensus
But I had thought
1985.
I had always planned
handle
it
can't
let
different
and
projects
leading to
by courage?
lower,
it takes
and buy the yen.
success?
What
selective
set
up
motivation
it helped.
advice do you have for
are
risks
the
trader?
beginning
out, it is very important
difficult to fight
back.
Most
starting
because it is very
take
1970s.
community.
think this long-term goal wasan important
success as a trader?
When you
to
if I were
your
Yes,I think
through the line and a 175-pound
to go into him.
in the markets. If
as far back as the early
to become successful,I would
the idea
about
that
a foundation to help the
Do you
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
of the
so that
by supporting
community
My family and I are directly involved in evaluating
deciding which ones to fund.
In
linebackerhas to stop him, he has to have the courage
You need that kind of courage to be able to participate
the
and the yen is sharply
dollar,
everyone is bullish
courage to fade that
the
One
a foundation
establish
When did you set up this foundation?
Can you expound on that?
If a 260-pound
How do you
have
into the market,
should
have the attitude that
if a trade loses, you
can
without any problem
and come back to do the next trade. You
a losing trade get to you emotionally.
you talk
and I have done is to
one
foundation
relationship
go
You
Can
my
the money I accumulate.
I do with
what
wife
success'.
judge
you
share some of our successwith
could
Is this
that.
to win.
Those elements seem fairly
willingnessto
capitalization.
adequate
that
do
various programs.
are the traits of a successfultrader?
What
149
GaryBielfeldt
GaryBielfeldt
that are too large at
enough
about
point,
Bielfeldt
the
beginning.
too far behind
have a tendency
They tend not to be
not
to get
traders
when they take risks.
judge
At
this
about
the
relevance
reason for keeping the
asked me to turn
and
application
comments
off
the tape
of poker strategy
off-the-record
recorder. He talked
to
trading.
His
was that he didn't want
150
GaryBielfeldt
to contribute to the
analogy particularly
record.
and
apropos
I found his
finally persuaded him to put it on the
Could you explain your analogy
I learnedhow
to play
of playing
as a form
of trading
image
between
of gambling.
at a very young
poker
and poker?
trading
age.
My
the percentage hands. You
don't
father taught
Ed
me
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
the
concept
are on the table and you
you feel the
that hand
the
you
your
wait
same
of poker strategy
I have
significantly.
in mind by waiting
for the percentage
and take a small
hand
in poker.
for
to trading,
always
get out
the right
trade, just like
loss;
it's
If a trade doesn't look right,
precisely
is attainable
provides
example of what
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
The portion
Want
an inspiring
Bielfeldt's
interview that I found most
between poker and trading.
It is also interesting to
in
this
similar
to
the
advice
Bielfeldt's
analogy
key point
compare
the
to
for
trade to
offered
James
Have
the
wait
right
patience
by
Rogers:
come along.
of Gary
his analogy
not only to the
public,
but to most of the
must
as well, Ed Seykota's achievements
community
of our time. In the early 1970s,
him as one of the best traders
He
and
conceived
hired
was
by a major brokerage firm.
rank
certainly
Seykota
developed
the
first
clients'
managing
quite profitable, but
impeded
for Seykota
catalyst
Bielfeldt's story
unknown,
completely
Although
financial
significantly
insightful
was
They
it
tried to keep
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.
you
What
strong hand\342\200\224inother words, when
in your favor\342\200\224you raise and play
principles
of winning
odds
of patience
concept
Gets
Everybody
hilt.
If you apply the
increases
are skewed
percentages
to the
a very
have
Seykota
just
commercial
money
in the
interference
His
markets.
and
second-guessing
This
its performance.
going out on his own.
system for
system proved
by management
trading
computerized
futures
experience provided the
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 the
to
transforming
ensuing
a handful
152
tively,
EdSeykota
\"You
know,
you really should interview
Ed
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
flight\342\200\224acontention
the airport, reaching the
through
I arrived
time
gate
with
made self-fulfilling\342\200\224I
raced
only seconds to spare. By the
in Reno, the tension from
my near-missed
flight had just
about dissipated. The drive to Seykota's
house was too far for a cab,so
I rented a car. It was very early morning, and the highway winding up
into the mountains
offered
vistas below. The classicalmusic
spectacular
station
I found on the radio was playing Mozart's Clarinet Concerto.The
was
combination
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.
In my conversation with Seykota,
both his intelligence and sensitivity\342\200\224an
has a way
of
looking
at things
moment, he could be talking
appear as the consummate
I was
struck by the
odd
combination
from a unique
vantage
about
scientist
analytical
153
Ed Seykota
engineering from
screen,
computer
bringing
MIT),
generated
designed. Yet, in another
of trading,
human behavior.
Indeed, in recent
that
has become very
into
insight
involved
in the
about
end up spending the day. Heis extremely
perceptive
asked
in
our
one
conversation, Seykota
For example,at
point
people.
me, \"How
minutes
many
particularly
question
able to pick up
been
was
also
fast do you
set
your
I found
watch?\"
this
striking in that in our brief time together,he had
on one of my basic character traits. The question
timely, given my
particularly
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
he wanted to be living.
the life
did
How
you first
get involved in trading?
decidedthat silver
stopped selling it. I openeda commodity
In the late 1960s, I
of my
insight.
I thought.
He
to short
some
copper.
(he holds a degree in
and
I would
advantage
point.
reveal great sensitivity
Seykota
years,
of
techniques
would
to the
to me that psychology, and its
field of psychology. It appeared
had become a more
their
solve
application in helping
problems,
people
and trading. I suspect
market
his
life
than
in
element
analysis
important
somewhat
find
this
contrast
artificial, in
would
that
probably
Seykota
the
same
and
are
one
and psychology
that to him, trading
thing.
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
intensity
At one
when the conversation turned
moment,
he
psychology
up a three-dimensional diagram on the
he had
programs
by one of the many
my
trading
virginity.
had to rise when
margin
the
account
U.S. Treasury
to take full
convinced me
While I was waiting,
my broker
I soon got stopped out and lost some money and
for the start of the big,
So I went back to waiting
Much
the day arrived. I bought.
bull market in silver.
Finally,
amazement and financial detriment, the price started falling!
and would
inevitable
electrical
to my
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.
At
first
it seemed
bullish
155
Ed Seykota
advantage of the lack
to test trading
systems
half year,I was
for
so
I took
the accounting
computer
by using
the weekends. They had an IBM 360
during
the course
of about a
up a large air conditioned room. Over
took
which
systems
There was a lot lessmanagement,
a reorganization.
through
able
of supervision
to test
about a hundred
of four
variations
simple
ten years of data on ten commodities. Today,
about
job takes about one day on a PC. Anyway,
there
was a possibility of making
confirmed
I got
money
same
the
my results. They
from
trend-following
systems.
of your job,
I take it that computer
testing of systems was not part
to do?
hired
What were you actually
since you did it on weekends.
the week, my normal Clark Kent
job was to load new rolls
type
turned pink. I was
when
the margin
machine
onto
the
Reuters
paper
them up
and
in strips
news
off
the
for
also responsible
hanging
tearing
line-feeds
between
to
tear
was
The
trick
machine.
the
on the wall behind
During
of
What was your first
I landed my first
a major
job
trading-related
Street in the
on Wall
early
1970s as an analyst
brokerage house. I was assignedto cover
markets. [Broilersare
The futures
job?
markets
chickens
young
for both
up to 2\\
the egg
pounds
with
and broiler
dressed
weight.
broilers and eggs have since disappeared
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
as
waning
Remember,
trading
in
those
activity
days
computers were still
typically
punch
so as to get
a smooth
edge.
The funny
would read the news sincethey'd
see the pages. So I started
reading
One bonus of this
to the brokers.
brokers'
thing
the news
job
was
to lean way
was
that hardly anyone
to
over the machine
and personally delivering it
that I got to observe a lot of
trading styles.
Your officialpositionsounds
accept such a menial job?
BecauseI knew
did,
have
I wanted
like
to be in
a glorified
the
business,
office boy. Why
did
you
and I didn't care what
I
or what I got paid.
card
devices used for accounting. The guy who was running the computer
seemed to see me as a threat
to his job security, and he
department
repeatedlychasedme off his turf. After about a month at that job, I
announced
that I was going to quit.
The head of the department calledme
in to find out why.
It was the first time he had ever
been
interested
in
to
me.
talking
I went to work for another brokerage house, which
was
going
Why
didn't
you
stay at your original position?At
least
there
you
were an 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
pressures
opportunities.
computers
156
Ed
could have accessto the computerat
you know that you
job?
Did
new
No, but
since
most of the
your
the company had just gone through
a major
shake-up and
had been fired, I figured there wouldn't be very
management
much
of a bureaucracy
What
became
to interfere with
use of the computer.
my
market
the
As
managing
money.
trading
I developed
first
the
commercial
large-scale
system.
the sugar
market peaked shortly
thereafter.
the sell signal as well\342\200\224a
signal
meaningful
retracements,
managed
long at that
point.
As you might
guess,
the error
They compounded
which also would have been
profitable.
of this interference, the most
line was that because
As a result, instead
ended
losing
money.
year
up
profitable
of 60 percent for the year, quite a few accounts
return
of a theoretical
was
one of the main reasons
This type of meddling
lost money.
actually
why
do you mean by large scale?
What
accounts
the
bottom
The
computerized
any
They put
very
in using my research resultsfor
got interested
management
Eventually,
kept moving higher without
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 computerized trading systems?
of your
157
Ed Seykota
Seykota
trade
of the
I eventually
quit.
What were the other reasons?
The
program
the equity
under
in
the
of the
agents
firm, and
million dollars\342\200\224a large
was several
management
of money
amount
by several hundred
marketed
was
1970s.
early
How did you get management
They were familiar
was doing everything
already
Richard
with
by
to the concept of using
disposed
favorably
Also, at the
manage money.
that
to
do?
program
trading
from second-guessingthe
signals.
program
generated a buy
5 cents. Management thought
the
and decided not
higher, they
pullback
came
they
systems
trading
were so new that
computers
take
to
signal
that
do
after
I just quit the research
accounts. After about
manager.That
shift
commissions,
which
money
you quit?
but I stayedon as a broker managing
to become a money
I gave up brokerage
from
allowed
me to get away
earning
my living from
a
to
I think
can be
counterproductiveincentive
department,
two years,
for clients. I switched
to
a pure
profit incentive fee
that
couldn't
continue
keep
Did
you
example, I remember one time
for sugar when it was trading
around
the market was already overbought
Yes,
although
management
trading
the system after you
left?
For
the signal.
When
up with the rule that
they
the
the rule to buying
on
market
kept
buy on the
would
[100 points equal 1 cent]. When
modified
generating
arrangement.
The program did fine; the problemwas
developed,
were
they
so that it would trade more
it would
What did you
making
How did your
point
would
a great buzzword.
was
\"computer system\"
time,
extent?
who was a pioneer in
at the time, he
Donchian,
trading systems, although,
hand.
Because of that exposure,
trend-following
developing
you to that
to support
system
income. I explainedto
more commission
be very easy to make such a change, but doing so
seriously impede performance. They didn't seem to care.
actively,thereby
them
me to change the
wanted
Management
no
the first
such
on going
first
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 my
customer
accountthat started with
is an actual
do
not
publicize
\"model
$5,000
account,\" which
in 1972 and has
158
EdSeykota
$15 million.
over
made
larger
many
multiples
With
performance
Theoretically, the
return
would have been
had there been no withdrawals.
like that,
with word-of-mouth
total
Ed
how come you
been
haven't
deluged
have
with
subtle, yet very important,
If, for example, they are able to support
associate
effects
me and my
long term, then they tend to help me. If, however,they
with the short-term ups and downs of their
account,
over
methods
the
get too concerned
they
can be
a half
About
did
you originally
dozen back in
the
early
Four.
money
decided
start out with?
1970s.
How many of thoseaccountsare still
One client made about
with
you?
million
and decided to withdraw
$15
and manage it himself;
another
made over $10 million
to buy a houseon the beach
and retire.
What source did you
I was inspired and
learn
from
before
his
and
designing your first system?
by the book Reminiscences of a Stock
Donchian's
five- and twenty-day
Operator
moving
crossover
and
his
I consider
average
system
weekly rule system.
Donchian to be one of the guiding lights of technical trading.
and
was
What
first trading system?
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
first
system
with
Were you
original
was a variation
as the
when
know
you
eventually
system
your
changed
needed to be
to be changed. The trick
need
which
he is compatible.
incompatible
with
your original
is for
a trader to develop a
system?
was very simple with hard-and-fast
I found it difficult to stay with
deviations.
system
rules
that didn't
the system while
allow for any
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
There is
would
work.
didn't really trust that trend-following
systems
seemed
of my
a
waste
it
don't.
of
literature
Also,
\"proving\" they
plenty
the
out
not
to
there
and
sit
to
MIT
education
and
intellect
figure
try
just
the
with
of
more
confident
as
I
became
markets.
trading
Eventually,
with
more
comfortable
I
became
trend, and more ableto ignore the news,
more \"expert trader
to incorporate
the approach.
Also, as I continued
became more compatible with my trading style.
rules,\"
my system
What is your trading style?
influenced
also by Richard
your
don't
Systems
My
accounts
of mouth
a
hindrance.
Howmany
word
changed?
system
on my performance.
being passed around by
to a first system impliesthat
How did you
systems.
I very
it was
system.\"
reference
Your
requests to manage money?
requests, but
new at the time that
\"expedential
rarely accept new accounts. If I do, it is
and
to determine the
only after considerable interviewing
screening
motivations
and attitudes of the client. I have
that the people I
found
receive
I do
159
Seykota
My
is basically
style
recognition and
money
trend following,
management
divulging trade secrets, how
spectacularly
outperform
The key to long-term survival
money
management
There are old traders
old, bold traders.
some
special
pattern
algorithms.
Without
standard
with
have
you
trend-following
and
prosperity
been able to so
systems?
has a lot to do with
the
system.
techniques incorporated into the technical
are bold traders, but there are very few
and there
160
EdSeykota
and
Witty
true,
but the question remains,albeit
There are many
trend-following
rules; why
you
have
I seemto have
systems
in
translated
with money
form:
management
done so much better?
I think
mechanical
that
I consider
mechanical
part,
it is related
computer version of what I do) keeps evolving. I would add
as a kind of system which,
myself and how I do things
by
I always follow. SometimesI trade
definition,
strong
feelings,
and
sometimes I just quit altogether.
The immediate
trading result of this
around
is
breakeven
to
somewhat negative. However,
jumping
probably
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
What percentage of
percentage
your
over
changed
trading
is systems
No. All
based? Has this
since (1)1 have become
mechanical,
have
trading, and (2) my mechanical
programs
and more \"tricks of the trade.\"
I still go through
periods
trend
factored in more
of thinking I can outperform
often
self-correcting
of the
Many
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
profitability
Periods
these systems becomeunprofitable,
traders
inexperienced
and
will get shaken out. Longevity is the
What are your thoughts
input in trading?
already
the
discounted
price,
if you catch on early, before
key
about using fundamental
that you read about are typically
Fundamentals
and
undercapitalized
to success.
as an
analysis
useless
as the market
has
and I call them
\"funny-mentals.\"
However,
others
then you might
have
believe,
valuable \"surprise-a-mentals.\"
Your
answer
technical
analysis?
is a bit facetious. Doesit imply
that
you only use
time?
Over time, I have become more
of
or not it is
whether
Life
trends.
good systems are basedon following
for the winter and keep on
south
itself is based on trends. Birdsstart
and alter their
track
trends
accordingly.
products
going. Companies
luminescence
and
chemical
in
trends
move
along
Tiny protozoa
conscious.
with touches of hunches based on about
to me are: (1) the
order of importance
In
years
twenty
and
chart
the
current
(3)
trend, (2)
picking a goodspot
pattern,
long-term
of my trading.
three
Those
are
the
or sell.
to buy
components
primary
ideas and,
fundamental
are
distant
fourth
down in very
my
place
Way
I am
more trusting
on some sort of system,
is done
trading
gradients.
off the
entirely
the signals based on
I override
sometimes
for trend-following
What are the presentand future
prospects
the growing prevalence of their use will doom
Do you think
systems?
them to eventual failure?
to my overall philosophy,which
has a lot to do with
the markets and maintaining
an optimistic
loving
attitude.
as I keep trading and learning, my system (that
is the
Also,
a gift.
161
Ed Seykota
through
but such excursionsare
my own system,
the process of losingmoney.
primarily a trend
trader
of experience.
quite
likely,
on balance,
they have cost me
money.
Ed Seykota
162
By picking the right spot to buy,
at which
reaction point
you
price
major
missing
will
buy?
do
you
mean
If so, how
determining
How about someactual \"war
a
do you avoid sometimes
moves?
Doesthat
that if you are bullish, you will always
wait for shortimply
term strength beforeenteringa position,
or will you sometimes
buy
a reaction?
If I am bullish, I neither
buy
already in. I turn
at the instant
bullish until
bullish
on a reaction,
my sell stop is hit.
Being
nor wait
for
I am
strength;
is hit, and stay
stop
and not being long is
my buy
bullish
Do
you
ever use contrary
the speakers
[The
no,
the
opinion as an aid
For example,at a recent
goldbug
were bearish. I saidto myself,
market
did indeed rally
after
Would you buy
Oh
Can you
I had
describe
a \"thing\"
because
trend was still
to
your
conference, virtually
is probably near a
all
that
I was some kind
and
of that
type of input?
down.
But
it might
get me to lighten
my
short position.
first
losses was in
my
silver,
blood
and
so as to avoid
are
The
elements
So
to be working.
pick
flash
What
I worked on myself with
werewolf.
I also avoidedwalks in the full moon.
your
trades?
the
and (3) cutting
although
system,
and override
my system.
elements
of good
losses.
do
any
occasionally,
Fortunately,
I will
I don't
get
an
usually
take
lasting damage to my portfolio.
of good trading?
losses,
(2) cutting losses,
trading are: (1) cutting
If you can follow these three
rules,
you may have
a chance.
What was your
most
and
is a great
banana
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
Dramatic
occurredshortly
my
It seemed to get into
me to pull my protective stops
of
on a big enough positionto
up
losses.
imagery.
positive
Mostly by my trading
impulsive
conference.]
mistakes that you learned from?
it would
hold momentarily and then
getting bear-raided. Naturally,
I got killed so many
times
some
more.
by silver spikes that I started
collapse
How do you
\"Gold
I tend
for silver for years. One of
many of my worst
hypnotize me. It inveigled
thinking
trading?
trading
specific
as were
far it seems
Sometimes.
bottom.\"
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
hypnosis
illogical.
stories\"?
not to dwell on past situations.
I prefer
Oh no. If I were buying,
I try to
would be above the market.
my point
a
at
which
I
to be strong
in
identify
point
expectthe market momentum
the direction of the trade, so as to reduce
risk. I don't try
my probable
to pick a bottom or top.
on
163
Ed Seykota
trading
Howdo you
handle
a losing
streak?
it out.
down my activity. I just wait
I handle losing streaks by trimming
a
is
to
trade
streak
emotionally devastating. Trying
during
losing
Trying
to play
\"catch up\"
is lethal.
Ed Seykota
164
Since you
system
primarily
no changes
imply
trader, wouldn't following
a systems
are
of trading activity
a
was
What
worst
single
your
loss?
market\"
\"thin
periods?
losing
during
165
Ed Seykota
are too thin when I want to get out of a bad position in a
me due
have, on occasion,moved
hurry.
against
rapidly
to surprise news. As soon as the news is digested,the market
thickens
All markets
I have incorporatedsomelogicinto
modulating
the
important
decisions
I tend
Psychologically,
performance.
I tend
so after
losses.
is
tendency
to get
for a growing
diversification
are at position limit
positions
my
activity depending on market behavior. Still,
to be made outsidethe mechanical
system
as how to maintain
boundaries, such
some
trading
need
such as
programs,
computer
to alter my activity
to be more aggressiveafter
are too thin.
markets
or when
account when
depending
on
been winning, and less
I have
a costly
seem OK. In contrast,
These tendencies
emotional over a loss and then try to get even with an
Most markets
up again at a new level. During the big sugar
moved
from 10 cents to 40 cents, I was carrying
and I gaveup several cents getting out of my
is equivalent to $1,120 per contract.]
few
makes
you a self-taught trader, or did
worthwhile lessons?
Are
trader
a self-taught
trader
another
teach
you
[Each
cent in sugar
position.
have enjoyed the spectacularsuccessyou
different?
you
Do you
decide
where
who is continually
both
studying
myself
have.
you are getting out before you get in on a trade?
position is
at the same time
to lock in a profit as the
stops
aggravating,
whereas
What is the maximum
individual
I intend
a trade.
nerve
losing your
percentage of equity
is devastating.
you
will risk
on any
trade?
to risk below5 percenton
OccasionallyI have
caused
I enter
taken
losses
a thin market to jump through
allowing for poor executions.
news
above that amount when
major
a trade,
my
stops.
markets.
I am not a casual
life. I have a passion
me.
am supposedto do with
my life.
What are the
rules
for trading. It is not merely
There is no question that
this
a hobby
is what
I
and
I normally move
I take
Sometimes,
these stopsin
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
protective
from my love of the
comes
success
It is my
trader.
or even a careerchoicefor
other traders.
set
prices
of contracts
traders
Very
What
I feel my
I
when
thousands
position.
overlylarge
I am
bull market
a. Cut
b.
trading
you live by?
losses.
Ride winners.
c. Keep bets small.
d. Follow
the
rules
without
e. Know when
to break
Your last two
rules
which
Seriously
now,
break
the rules?
are
question.
the rules.
cute because
do you believe:
they
are
contradictory.
Followthe rules,or know
when
to
I believeboth. Mostly I follow the rules. As I keep studying the markets,
I sometimes
find
a new rule which
breaks
and then replaces a previous
I get to a personal breakpoint. When
rule. Sometimes
I
that
happens,
out
of
the
markets
and
take
a
vacation
until
I
feel
that
just get
altogether
I am ready to follow the rules again. Perhaps
some
day, I will have a
more explicit
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
How important
is gut
trading
just
\"M.\"
feel?
go
find
something
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
\"intuition\"
and \"into wishing.\"
trend
like surfing.
for
What
happened
1980?
Did
an important
to the
educational experience.
rules in your systemirn
you override them?
of tlue
out
even though my system was largely
to trade
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 continued
trading?
is a little
Charting
have
the drive
to
1987?
for the month
the
day
as a whole,
crash.
different now
much
greater
than
were five to ten years ago
participation by professional
they
current
managers?
wrong?
money management
and then
him,
of the October 1987 crash.I also made
money
and for the year, as well. I lost on the day after
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
No.The
because
all
up
for
successful
and fluid dynamics in order
resonance,
have to be able to sense when it's happening and then
act at the right time.
because the
went
trader?
a lot about the physics of tides,
to catch a good wave. You just
have to know
don't
Are the markets
One of my worst years was 1980.The bull markets had ended, but I keplt
in at lower prices. The markets
keplt
just
trying to hold on and buy back
I
was
so
bear
market
a
seen
I
never
before,
had
major
on breaking.
set
can be used for
to be a subset of charting.
following
You
of
What was your worst year? What
reading
average
the
a superior
trader to do his trading
he really loves to do.
chart
believe
advice you can give
What was your personalexperience
in October
feel is important.
between
That he should find
I consider
idea depending on the reason for doing so. Consider,
had a successful modification policy, say \"M\" for
\"S,\" then
system
changing
most important
of the bet?
a good
you might be better off
167
is the
What
Do you
How important to trading successis varying
Gut
Ed Seykota
markets
they
keep
are the same now as they
changing\342\200\224just
like
Does trading becomemoredifficult
It
becomes
without
more
moving
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
access to competent peopleto
support
type of support do you
mean?
What
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
endings
friends, associates,and
Do you
to be able to smell the
seem
old-timers
of major moves.I also
receive
important
support
169
Does the stock market behave differently
family.
use any outside advisory services?
The stock market
behaves
I
the business
track
of a lot of outside advisers,mostly
by reading
keep
break
brokers.
The
services
even,
from
usually
my
press or hearing
are likely headed for trouble.
then
they
except when
they start to gloat,
market
it
to demand for news about
recent
letter
exceptions,
important
market
activity.
writing
since
respond
there are certainly
they generally
Although
is often a beginning
job
be handled by inexperiencedtraders
as such may
and
Good traders trade. Goodletter
Do you use the opinions
or do you
writers
write
in the
or
non-
operate
traders
other
completely
in making
to understand
What
do
stock
market\" ?
what
winning as
solo?
the confidence that you could keepon
point did you get
a trader?
I vacillate between(a)\"I can
keep
lucky.\" I sometimesget
confident
How
on winning,\"
The stock market
identifiable
patterns
Common
and (b) \"I have
just been
down
a
from itself in
differently
think
trying
the market
that
from
the
easily
repeat.
exactly
for inflation,
outlook
long-term
Inflation
is part
of the way
currencies
eventually
get
invested
at the
considerwhy
societies
debased\342\200\224like
has anywhere
nobody
Gold tends to be dug
of all
near that
refined,
up,
markets?
the dollar, and gold?
sweep away the old order. All
it or not. Compute one penny
time of Christ, compoundedat
gold on the
3 percent
per year.
these
amount
planet
seems
I project
the trend
Do greattradershave
for trading?
entropy
talent
a special
absorbed
a special
They don't have
What is the balancebetween
where
one
as one
toward
talent for trading
just as good musicians and
fields. Great traders areoneswho are
talent
the
versus
talent\342\200\224the talent
work
a lot
I don'tknow
days.
again. The
to decrease over
for their
talents
by the talent.
Then
and then buried
time. A lot has been collected in vaults.
a central world gold stash.
Goodtraders have
good athleteshave
For example,
market
behavior.
transcend individual
crawl up
in common with the way cockroaches
is
wall. Unfortunately for cockroach followers, there
patterns
behaves
seldom
of my ability just before a major
similar are the pricepatterns in different
bond prices have
and
most
streak.
losing
than
\"The stock market behaves differently
mean,
you
geographical
At
I don't
sense trying
to understand
the stockmarket
music. A lot of people would rather understand
trading decisions,
ignore
\"maybe
to understand,
futile.
letters.
from other traders, especially the ones who
advice
The old-timers,
who talk about
\"sure
a
on
to
are
thing.\"
they
there is a chance of so and so,\" are often right and early.
I usually
is hard
any more
makes
What is your
of
believe
If this
market.
the markets is a bit
to understand
letters?
letters tend to lag behind the
traders.
differently
it is because trying
stock
markets?
other
from
than make money.
Howabout
industry,
a trade.
from all other markets and it also
differently
from the
behaves
Market
to take the other side of
one around
no
from my
starts and the other stops.
in trading
has them.
success?
EdSeykota
170
of a role does luck play
much
How
in
Ed
success?
trading
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.
How about a seriousanswer?
Seykota
be necessary
to emulate his experience, not to avoid it.
winnings would
Furthermore, you would
also need to overtrade and have
probably
while
wipeouts,
fired up your emotions
you simultaneously
with the
burning desire to \"win it right back.\" Acting out this drama could be
it also seems terribly
However,
exciting.
One alternative
is to
expensive.
keep bets small
and
asymptotically
and
discovered
What
My
developed.
effect has trading had on your personallife?
life is integrated
personal
Is the joy of
The joy
winning
of winning
with
my
as the pain of
losing?
the pain
of losing are right
up
there
and the joy of losing. Also to considerare the
of winning
The relative strengths of these feelings
of not participating.
increase
with
the distance
you
made
of the
from
trader
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.
do
so many
traders
fail in
the
marketplace?
For the same reasonthat
as intense
and
have
I notice thereisno quote
Why
life.
trading
then to systematically
keep reducing risk during
That way you approach your safe
money
a gentle financial and emotional touchdown.
and
drawdowns.
equity
are words
or \"smarts\" or \"gift\"
\"Luck\"
proclivity
indicating an attitudinal
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
171
with the pain
joy and pain
his commitment
tend
to
to being a
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
is true for other fields of pursuit.
are
called
What
can
a losing
trader do to transform
himself
into
trader?
a winning
trader.
When
to avoid the JesseLivermore
speculator
of
the
early
lock
some
of it away
was a famous
[Livermore
and
lost several
who
made
century
experience?
twentieth
fortunes.]
I
feel
the
Livermore
experience
was a function
had little
to do
with the location of his assets.
that
reading
Jesse
Livermore
then
find
a key
used to lock some of
when he neededto
get
his psychology
I remember
fact,
of
In
at them.
trader can do little
to transform
himself into a winning
trader.
trader is not going to want to transform himself. That's the kind
of thing winning traders do.
A
your first few million, did you
and
winnings
away and
Therefore,
locking up
his
losing
A losing
How would
rate the relative importance between
you
psychology
and market analysis
to successful
trading?
of analysis and puts
Psychology motivates the quality
is the driver and
is
the
road map.
Psychology
analysis
it to use.
focused
have
You
a lot on the field of
talking to a personwhether
winning
or
losing
traits
person
would
probably
you tell by
be a
have
usually been winning
at
whatever
field
do you look for
2. He/sheloves
to
identify
trader
the winning
to win.
all traders want to win?
Don't
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,
everybody
he wants.
he is really getting what
On some level, I think
into
their trading patterns,
I think that if people look deeplyenough
all their goals, they are really
find
that, on balance, including
they
may not understand it or want to
they
they want, even though
getting what
admit it.
A
of mine tells a story
friend
doctor
used her condition
to
demand
others around
As
an experiment
her.
entirely.
life. People' s trading
performance
than
like
would
to admit.
they
I think
attention
about
and, in
a cancer
patient who
general,
to dominate
prearranged with
her
family,
reflects
probably
of the most flamboyant
than profits alone; they
some
that
and
avoided
her
than
their priorities more
traders are
interesting
also playing for
playing
probably
excitement. One of the best ways to increase profits
is to do goal setting
and visualizations
in order to align
the conscious
and subconscious with
I have worked with a number
of traders in order to
making
profits.
loves to trade; and
He/she
excuses
for
personality?
1.
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?
traders
Yes, the winning
they are in for years.
What
that
Can
psychology.
173
Ed Seykota
EdSeykota
172
the
more
examine
their
hypnosis,
breathing,
The
traders
they
didn't
and align their
priorities
pacing,
usually either (1) get much
want to be traders in
is a happy circumstance that
when
she also gives us the means to satisfy
the
I sometimes have
market.
Although
uncannilythey
often
them.
skill
first
place.
the skill,
lack
nature
It
a combination of
gestalt, massage, and so forth.
more
or (2) realize
successful,
really
skill can get someone with
I use
goals.
visualization,
Surely, some people losebecause
they
want
to
win.
really
lack
are
even though
they
desires,
gives us true burning
Those who want to win and
to help
them.
related
to the impending direction of
these dreams tend to be very infrequent,
dreams
prove
right. Have you had any
I know several peoplewho
claim
I think
one of the
feelings
which the conscious mind
functions
to have
of dreams
finds
similar
experiences?
market insights
during
is to reconcile information
intractable.
a
dreams.
For instance,
and
I once
I expected
silver to keep on going up. When
1
down instead, ignored the signs and tried to tell myself it was
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,
that stalled
out and started going down toward an
shiny, silver aircraft
told
a lot
of my friends that
it went
inevitable crash. I eventually
dumped
and the dreams stopped.
short,
my
silver position,
even went
EdSeykota
174
How
judge success?
do you
I don'tjudgesuccess.I celebrate
finding and
following
one's
it.
I think
success has to do with
calling regardless of financial
gain.
the humor
in Seykota's comments; there is a great
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 by
of serious
provocative
concept.
Hite
Larry
RespectingRisk
Hite's
in the financial markets was sparkedby a college
interest
as Moses'
to the
course,but his path to Wall Street was as circuitous
Land of Israel.His early adult years did not offer any clue that this was
a young man headed for eventual major success.
his academic
First,
Larry
was
inauspicious.
managing
to hold
performance
never
dual career of actorand
successes,
movie
so often
he managed
Then he went
any
for
screenwriter.
very
through
a string
of odd jobs,
long. Eventually, he drifted
While
not recording
any
a
into
major
to support himself, and enjoyedhiswork.One of
his
which never found
its way into production, was optioned
he began to view it as a source of steady income.
One day, Hite heard H. L. Hunt on the radio describing how he
scripts,
that
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
position.
176
Larry
Hite
Hite's real interest remained in the financial
markets.
hear about people working
on Wall
Street to become
screenwriters.I may be the only person who ever workedas an actor and
a scriptwriter to pay formy Wall Street career,\" he says jokingly. In 1968,
Hite
atop
New York's
clouds.
We took
Our interview
Meanwhile,
\"You often
Hitefinally
the
futures
that
field,
a
full-time
decided
to pursue
his primary
markets,
he didn't
have the
but
held a Ph.D.
in
no immediate
One
statistics.
the hint
World
it was blanketed with
the last ones left in the
we were
when
and finished the interview
a day
restaurant
office.
in Hite's
fascinated with
how to break into
slightest
idea
Several
years later, he became
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
partnership,
over lunch at Windows of the
conducted
was
World Trade Center, on
While
interest.
so he began as a stockbroker.
broker.
commodities
177
Larry
Matthews,
pay, he enlisted Peter
year later, he hired Michael Delman,
who
a
systems for a defenseelectronicsfirm. Matthews
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
of computer
How did you first get interestedin markets?
in college,
I was
When
had a trenchant
asa bank
examiner.
he turned
to the
I took a businesscourse with
a professor
who
To give you an example, he also worked
before
day,
leaving the bank following an audit,
of humor.
sense
One
bank president and, as a joke, said, \"Got you!\" The man
a
heart
had
attack on the spot. After that, they did another audit and found
in class
one
that the bank president had embezzled$75,000.Anyway,
is reviewing
all the financial instruments: stocks,
day, this professor
bonds, and
so
on. Then
of all\342\200\224commodities.
of them
most
borrow
somereason,the
he says, \"Now
Thesepeople
idea
that.\"
The
of trading
we
trade
come
to the craziest market
on only 5 percentmargin\342\200\224and
whole
class laughed, except me. For
made
sense
on 5 percentmargin
perfect
tome.
Delman.
to make
Mint's objective was never
the largest percentage return.
was
to
aim
Hite's
for
the
best growth
rate consistent
Rather,
philosophy
with extremely rigorous risk control.It is in this perspective (return
the inception
of trading in April
risk) that Mint really shines. From
relative to
1981
through
return
of over
mid-1988,
returns
only 15 percentand
calendar
under
largest
1 percent
loss
a worst
in any
annual compounded
that is most
of plus 13 percentto
six-month
in any twelve-month
period
was
period (not
just
years).
Not surprisingly,
Mint's
spectacular
growth
of equity
trading
with
$2 million;
Significantly,
management
has
Mint
consistency
have ranged from
of plus 60 percent.Their
a best
an average
registered
30 percent. But it is their
annual
impressive:their
Mint
performance
has resulted in a
under management. In
1981, they began
April
over $800 million.
today, they manage
is no evidence that
there
the surge
of money under
had any deleterious effect on performance.Hite believesthat
can ultimately
for a futures
stellar
fund.
manage $2 billion\342\200\224an unprecedentedly
large
sum
When did you
Not
until
many
weekend,there
first
get involved
in the financial markets?
years later. I was a rock
were
three
separate
promoter
shootings
at the time, and on one
in
clubs
at which
the
I decided it was an opportune time to
were
working.
groups I managed
markets.
careers
and
true
interest\342\200\224the financial
change
pursue
my
Although
I was
I didn't have any idea how to
really interested in futures,
field. So I decided I would start
out as a stockbroker.
look for a job in that
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
term could be traced to
of the most expensivechip
the
color
Carlo. I said to myself, \"Aha,
now
in
Monte
all
about\342\200\224gambling.\"
I threw
away
[Principlesof Security
Analysis,
considered
market analysis] and bought
came away with the idea that successful
if
methods that
could
could
you
beat
What made you believe
odds in your favor?
I don't know
realize that
that
the
compute
the market.
that
game
is
of Graham and Dodd
by many to be the \"bible\"
a book
the
you could
called Beat
I
Dealer.
the
investment
was really a matter
odds,
could
you
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.
how
develop methods to
have done in
it would
the
and get a fairly
past
in the future.
will perform
system
put
are the same, if you use
can test a system and see
you
The point is that because
people
methods
to
avoid
hindsight,
rigorous
sufficiently
is our
That
it all then, but
are inefficient.
over
the years
I have a friend
of how that
idea
good
edge.
the
that the markets can change and the
Isn't it possible
from
the
different
past?
very
I understood
markets
what this
my copy
of stock
of odds,and
I know
179
Larry Hite
will
future
be
I came to
who
is an
economist. He would
to me, as if talking
to a child, why
try to explain
I was trying to do was futile,
what
because
\"the markets are efficient.\" I
have noticedthat everyone
who has ever told me that the markets
are
efficient
is poor.
He argued that if I could develop a winning
on a
system
computer, so could others, and we would all cancel each other out.
The
markets
may change, but
testing
stage, before we actually
partner
Michael
periods
as a measure
Delman
came
When we were still
won't.
people
started
up with
managing
the
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
solely
systems
to know
you really want
in a holding period of any length.
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 simulations,
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,
and
100 percent.
I will
tell
you
how confident
There
evaluation
process.
a colonel
in the British
I am
of
validity of our
future
the
is a fellow who works for us who used to
army. His service specialty
was
be
dismantling
did you do it?\"
\"It wasn't
I asked him, \"How
all over the world.
of
a
bomb in
that difficult,\" he says. \"There are different
bombs;
styles
East.
You
there
and
is
from
a
bomb
in
the
Middle
different
go
Malaysia
ask
a
I
\"Let
me
see what kind of bomb it is and take it apart.\"
said,
you
bombs
question.
What happens
when
you
come
I came
into the
office
one day
a bomb
across
know?\" He looks me in the eye and says, \"You
and hope it is not your
last.\"
impression
and found
record
this
same
that,
your
you
don't
first
steel-nerved
of tears. I asked him what was wrong. It
virtually
which
out that the Fed had made a major policy change,
turned
our
which
market
trends.
reversed
fund,
Overnight,
many major
dramatically
individual
on the brink
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 t-h-e
p-h-o-n-e.\"
I was a broker,my
When
boss
client
when
he is losing money, someoneelsewill.
when
I was
a broker,
they
you
I did the same thing.
about their broker, I would
When I called prospectsand
complained
in that trade?\"
So I get the
show that this
account
on the phone
of event
type
say,
\"Oh, how
and explain that
our
simulations
that
I
will
be back to a new high.
am confident that in nine months the fund
some
\"In fact,\" I said, \"I have
borrowed
just
money to add to my own
in a surprised
\"You
did
that?\"
he asked
in the fund.\"
investment
really
tone. I assured
Well, the
I did.
doubled
account
shot
immediately
that
him
up on their
straight
I be
clients.How
could
What
makes
this
what
will
happen
tomorrow,
and the fund
investment,
of our biggest
systems were about.
you may not know
is one
account
up. Today
what
so sure? I knew
business so fabulous is that,
that
those
while
you can have a very
good
happen over the long run.
The insurance business providesa perfect
analogy.
year-old guy and you have absolutely no idea what the
will
be
alive
olds, you
can
one year
later.
work
what will
Take one sixtyare that he
odds
one year later. However,if you take 100,000 sixty-yearof them will be alive
many
get an excellent estimate of how
We
do the same thing;
for us. In a sense,
we are trading
I have a friend who went
I can
idea
trade by
broke
we
let the
trading
futures.
same.
following
a computerized
ratios far
achieve return/risk
we don't
that
you
the
above
know. No matter what
are doing,
to
average?
industry
information
I have
you can be wrong.
of $100 million. He taught
you
a friend
who has amassed a fortune
in excess
me two
lessons. First, if you never
bet your lifestyle, from a trading
bad will ever happen to you. Second,if you know
standpoint,
nothing
what the worst possible outcomeis, it gives you tremendous
freedom.
The truth is that, while you can't quantify
can
reward,
you
quantify risk.
law of large numbers
I will
world's
He can't understand
you an example
give
largest
I walked into
how important
this
is. One of the
advice
coffee traders invited
me to his house in London.
When
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
know
trade
are;
I know
the
\"You
ministers.\"
are right,\" I answered, \"I
don't
anything about coffee. In fact, I don'teven drink it.\" \"How do you
\"
it then?\" he asked. I told
I just look at the risk.\"
Well
this
him,
great meal lasted for severalhours. Five
and five times I told him that I managed
Three months
me what
he asked
times
I did,
the risk.
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.
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.
how
systems.
basic
could he put
will occur once every few years and
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
systems\342\200\224and quite
have, no matter what
to be honest,
And,
There
Because we know
me that if you don't call your
taught
181
Hite
Larry
percent
So the very first
rule
we live by at Mint is: Never
of total equity
on
any trade.
individual
to any
indifferent
is absolutely critical.For
account
that
withdrew
of
the
money.
risking
trade. Keeping your
example,
this
that
riskmore
1 percent,
than
1
1 am
small and constant
I know had a large
risk
one manager
half the money he was trading.
his position size in half,
contracts. Eventually,
By only
Instead
the
same
of cutting
number of
manager kept trading
of the original money became lOpercent
half
Risk is a no-fooling-around game; it
does
not allow
for
182
If you do not
mistakes.
the risk,
manage
eventually
they
will
Hite
Larry
carry
you
So one of the key differencesbetweenyou
out.
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
signal,
trading
the
When
but
light
we will
we liquidate
signals. When
is yellow, we will
not put
existing
on
positions
in determining
the
liquidate
is green, we take all signals.
an existing position on a
position.
Finally,
the
a new
lights
light
automatically,
when
the light
and we do not
take
is red,
any
new positions.
For example,in
back to $1.00, we got
Hite
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
other
and
is that you have developeda way
managers
The secondthing
and
183
Larry
of
trend-following
when not to
defining
play?
In
any
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, you
situation
of players:the
trade,
knowledge
if they are caught
product
example,
can offset their
risk
have the
advantage
of
when
a bad
position
in the futures
product
not
having
odds are in his favor. That is an important
the
markets,
they
cash market. The floor has the advantage of
the
be faster
than the floor. While
speculator
the
or the speed, he doeshave
knowledge
choose
to only bet
can
to play. The speculator
in the
speed. You can never
doesn't
in
positional
advantage.
as a signal
before that you used increasedvolatility
use to
data
do
of
you
past
many
days
You mentioned
to stop trading a market.How
determine
your volatility
Anywhere
from ten to 100 days.
When
say ten
you
to be deliberately ambiguous
to 100, are you trying
that
range?
you use different time frames within
or do you
mean
We look at
different
I fully
time
my
windows
the
understand
However,
filter?
one
question
in that range.
of your 1 percent stop-loss rule.
is: Once you are stoppedout of a
logic
gets you
providing an oppositesignal,* what
direction?
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?
the system
position without
back
rigid risk control.
If the
market
*For
makes
example,
a new
high, we get back in.
if a long position is stopped
out on a money management
rule without
system will still be in a long mode and no buy
actually being generated,
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.)
a sell signal
the
184
Larry Hite
But suppose that
you
not
whipped between beingstopped
get continuously
and
out
That
happens,
You
have
events
but not
enough to be a problem.
an incredibly
strong respect for
in your trading career that
risk. Were
there
ingrained you
any
with
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
exactly
attitude?
these numbers
I first
bought
pork
became involved in
in September and sold them
bellies
So I formed
a fund
always made a profit.
on
this
trade.
It
I
worked.
put
doubledthe
the
At
before
about
July,
a group
with
I felt
money.
I had a friend who followedthe
time,
know anything
I noticed
commodities,
same
of
silver.
father
you almost
into
I didn't
market.
I only knew about pork bellies.Hetalked
me
corn;
corn
the old crop. Since this
buying the new crop com and selling
to be a relatively
safe
supposed
trade, in that I was
into
in one contract month
position
really loaded up. Shortly
and literally
such
that I remember walking
despair
down
getting
At
much
the time,
down
long
I was working
for
a sophisticated
To this
day,
Sure enough,
stairway
\"Dear God,
loud,
go into a
international firm,
account
personal
to
market
risk?
heed
traumatic
experiences
caused by a
I will
in,
witnessed
failure
you.
examples
He
\"Look,
my financial
career, I have continually
of other people that I have known
ruined
by
a hard
take
throughout
to respect risk. If you
don't
take
being
look at risk, it will
a
who
started
estate he bought
at a palatial
in England.
but he turned
arbitrageur,
out
to be
made money. One day
he take the
sell
signal,
he actually wound
up
going
market
went
down.
I told him, \"Get out!\"
but
the
long.
he
will come back.\"
else.
and everything
get out, and he lost the mansion
other
hundred
box on a streetwith a
ticky-tacky
a rented
of his estate: \"Beverly.\"
I still remember the name
day,
a fortune on that
made
tell you
in
the
answered,
another
option
story.
market.
trade.
I have a cousinwho
turned
$5,000
One day I askedhim,
\"How
did you
\"It is very easy. I buy
but if it goes down, I don't get out
I trade for a living,
and
an option
until
I can tell you
into
do
and if it goes up, I stay
I am at least even.\"I told
him,
is just not
going
that
strategy
have
it doesn't
in the long run.\" He said, \"Larry, don't worry,
to work in the long run, just till I make a million. I know what I am doing.
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 goes down,
this time,
to work
Not for myself, but
in
who owns $20,000
he didn't
have
would
I still wonder
it?\"
other
are
example\342\200\224you
$1,000
houses. To this
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
$100,000
Were there any
him
market
\"The
Well,
thought.
failure
only didn't
insisted,
plea, a Swiss banker came
what
he must have
providential
my
the staircase.
out
with
that
a bad trader. He developeda trading
system
he saidto me, \"I am not taking the sell signal in gold; it doesn't look
of the signals are wrong
50 percent
anyway.\"
right to me. Besides,almost
limit-down
to the
sake of the
the
as the guy
Well, he may have beena great
Now he lives in
out
but please don't let the
I lose,
went
limit-up.
on my knees and saying
and just as I was making
walking
I was
month
went
I don't care how
debit.\"
the
I was short
and the month
I was in
the
thereafter,
I
position in another
month,
released a
government
remembervisiting
Not
long
a short
with
In response,
estimate.
surprising
crop
was
my
offsetting
was
option
for
when
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.
I have a goodfriend
that if you
of friends, and I
like a genius.
up
risk position
the
worth
When
an older friend
you are on
The same lesson
I had
motorcycle,
He told
making
that
a kid and got my first
I was
When
the position at new highs?
reentering
personal
goes into a wide trading range, might
market
the
185
Larry Hite
only
186
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
a very
president,
nice guy, hired an option trader who was brilliant,
stable. One day the
option
a losing position.The
advice.
disappeared,
leaving
was not a trader, and he sought
the
president
do you think
what
\"Larry,
trader
firm
do?\" I told him, \"Just
I should
not
but
with
stuck
my
get
out of
the position.\" Instead,he decidedto hold on to the trade. The lossgot
little worse, but then
the market
came back, and he liquidated the
a small
profit.
After this
incident,
position at
a
who worked at the same firm,
another
job.\" \"Why?\" he asked. I
I told a friend
are going to have to find
answered,\"We work for a man who has just found himself in the
middle of a mine field, and what
he did was close his eyes and walk
through
we
\"Bob,
it. He
now thinks
that
the proper technique
year later, this same
in options
position
little
out,
for
small
he decided
he finished
of a mine field,
you are in the middle
close your eyes and go forward.
Less
than one
man had to liquidate a huge delta neutral
spread
whenever
is to
[a balancedposition
price moves
in
either
to get out of the
liquidating
that
whose
will change very
of just getting
at a time. By the time
he had gone through
all of the firm's
position
position,
value
direction].
Instead
one leg
capital.
Besides errors in risk control,why
Sometimes,becausetheir
do
people
lose money
trading?
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
187
Larry Hite
Hite
Larry
of
eight
every
name
the
Obviously,
years. [Bonds go up when interest rates decline.]
\"bonds\" means a lot more to him than the reality.
You trade a very
wide
variety
Do you trade them
of markets.
all
the
same way?
money. Mickey Quenington, who is
me to a former chief executive
once introduced
director,
to which Hite gave 50 percent
firm
of this firm [E. F. Man, the
for financial
backing].
company in exchange
ownershipin his management
This guy was a tough, old Irishman and he askedme,\"How do you
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,
We don't trade
our marketing
we trade
markets,
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
that
I married
a very proper English
her
considers
me a bit
woman
crass.
who
I was
I assume that if you trade all marketsthe same,
you probably
refers to the process of
believe in optimization.
[Optimization
many
of a system for
variations
the
past
and then
don't
testing
selecting the best-
this
finefor actual trading. The problem with
and
future
link
between
is
that
the
tuned approach
performance
past
is often a very rough one.]
performing
version
Absolutely.
We
get by
have
not being perfect.\"We
we are looking for the
a perfect
system
how rich you can
the
for
method;
are not looking
optimum
method.
Anyone can sit down and devise
a saying here: \"It
hardiest
for the
past.
is incredible
188
Hite
Larry
any technical indicators that
there
Are
found
to be
None of them seemto prove
out in
you
have
for his firm for
recommendations
out trading
Jack had been putting
his
of
all
recommendations,
if
followed
that
I
found
you
you
many years.
did
Jack
how
he
I
asked
in
have made money
would
every
year. Finally,
if
He
foot-four.
six
Jack
was
said, \"Larry,
it. You have to picture that
this.\"
to
do
is
have
all
is going,
you
you want to know where a market
his charts on the floor and jumped up on his desk. He said,
He threw
overrated?
indicators.
Overbought/oversold
testing.
of indicators
types
Any
if a market
First,
should,
the
news
only
able
why
mere
important
the gold market
market broke sharply
the best
and
The
sale.\"
that
Ed Seykota
are two that come to mind.
in the way
news
do is go up
can
after
taught me. When
it has
$1;
The second
that.
Ed Seykotaactually
of your
percent
but
you
you
learned
from
a market
just
to be
item is
makes
results are going to be.\"And
the
he
was
more
you risk, the
absolutely
more
big picture.
Right, because 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
In other words, I knew
with
your risk, and went
that
the
controlled
traded across the board,
I
seeit
could
had
to
work.
trend, it just
if you
clearly.
absolutely
final words?
Any
I have two basic rules about winning in trading as well as in life:
you don't bet, you can't win. (2) If you lose all your chips, you
Ed Seykota?
his philosophy
one day: \"You can risk 1
can
risk
5
you
percent, or you can risk 10
capital,
he meant get a perspectiveof the
by that,
I assume
explained
better realize that
it will tell you!\"
it
that
a historic
it is telling you
how
something. No matter
many people tell you
the market shouldn't be that
or why nothing has changed, the
high,
fact that the price is at a new
tells
has changed.
high
you
something
Any other lessons that
percent,
there
you
something
very important. For example,when
of the Iran/Iraq war first came out over the
newswire, gold was
to move up $1.1 said to myself,
\"A Middle East war has
something
high,
doesn't respondto
at it,
\"Look
it is telling
broken out
a great
you consider particularly valuable?
really trade off of them,
I don't
Although
189
Hite
Larry
volatile
(1) If
can't
bet.
the
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
your
trading systems, were there any other
traders
who taught you
valuable lessons?
Jack Boyd, who hired me as a
Absolutely.
read
broker/analyst.
Having
that Handy and Harman had said in their annual
report that silver stocks
totaled
either
three billion or seven billion ounces,I wrote
a
on
the silver market
in
there is either twice
half.\"
job.
That
report
report
which
as
much
I said, \"According
silver
to
Handy
as some people think
went over very big with
Jack
and helped
and Harman,
or less than
me land the
1. His
system
exceptions,
2.
never
and
trades counter to the
he always
follows the
market
There are no
system.
The maximum risk on each trade is limited
equity.
trend.
to
1 percent
of total
190
Larry
3. Mint
to an extreme. First,
diversification
carries
a combination of many
individual
performance,
different
but
systems,
for their
also
their
is really
system
not only
selected
Hite
for
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
is continually
in each market in
tracked
or temporarily
signals to liquidate
where the risk/reward ratio exceeds
One final
some
colorful
observation:
greatest
of Ed
nature
gives us true
Seykota's
burning
in
to generate
markets
those
limits.
earning a modest living
at
rock
actor,
promoter), Larry
he had the
single endeavor for which
I found this to be a striking
manager.
comment:
order
trading
well-defined
merely
in the
enthusiasm\342\200\224fund
example
satisfythem.\"
After
suspend
careers (such as, scriptwriter,
Hite succeededspectacularly
Mostly
commodities.
and agricultural
goods,
4. Volatility
selected
\"It
desires,
is a happy
circumstance
it also gives us the
means
when
that
to
Stocks
II
Michael
The
Concept
Steinhardt
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,
mitzvah,
when
of Steinhardt,
his father
Fine and Berkowitz\342\200\224the
predecessor
to
Steinhardt
Partners. (Fine and Berkowitz left the firm in the late 1970s.)
In the twenty-one
years since its inception, Steinhardt's firm
achieved
a truly
remarkable
track
record.
has
Steinhardt
time,
During
has realized a compounded
annual
rate of over 30
growth
a 20 percent profit incentive
percent (just
under 25 percent after subtracting
an 8.9 percent
the S&P 500 index registered only
fee). In comparison,
that
Partners
the same
rate (dividends
included) during
growth
compounded annual
firm
the
start
in 1967
with
at
its
One
dollars
invested
thousand
period.
to over $93,000 by Spring 1988 (after deducting profit
would have grown
in perspective,
the same $1,000 investedin
incentive
fees). To put that
194
a basket of S&Pstocks
part
Steinhardt
Michael
only have grown to $6,400. Gain is only
track recordalsodemonstrates
admirable
Steinhardt Partners has only witnessed
two losing years. In
the net loss was under 2 percent before
incentive
fee
profit
195
Michael Steinhardt
would
of the story; Steinhardt's
consistency.
both
cases,
adjustments.
Steinhardt's superior performance
He is both
of approaches.
myriad
trader; he is as comfortable
has
achieved by using a
investor and a short-term
been
a long-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
shorting
Steinhardt
enough,
stocks
as buying
will override
the
trader
the position.
and
the
are
What
elements of your trading philosophy?
major
is not the
The
word
\"trading\"
the
sense
that my frequency
word \"investing\"
would
trading
implies
example,
if
an anticipation
long
the
be a trader in
I may
will
time
of purchase.
For
tonight
because
I expect
at the
and I plan to sell
be bullish
for the
is trading.
The bulk of what
market,
I do
is for a
Forexample,
and for more complexreasons.
duration
longer
I went
of a sale
tomorrow\342\200\224that
position
much
of things.
I think
long stock index futures
I go
tomorrow's trade number
my
way
of transactions is relatively
but the
high,
if
not
In
as
more.
much,
mind,
my
apply just
in 1981,1 held that
markets
debt
when
for two
position
and a
half years.
for
Well,
of this book, I would
purposes
call
still
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
do you
then
How
define the
difference
between
First,
a trader
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
I interviewed
tough side. The man
was
relaxed, soft spoken,
and
patient,
good humored. (Of course,our
interviews were
outside of market
always conducted
Steinhardt
hours.)
possesses
a keen
sense of humor. He has been known
to call
friends
impersonating an IRS agent, deliberately
mumble
fictitious
orders to
brokers right
saw
Steinhardt's
the
market
close, and double-talk in
Corey-like manner when he wishesto pull the leg of an analyst
who calls him. His conversationis also
liberally
before
sprinkled
dishisms\342\200\224\"proprietary
newfangled
fund
products.
dreck,\"
for example,
a Dr.
Irwin
I make two key distinctions.
as long. In contrast,the
mutual
manager of a typical
uncertain
the
about
he is always
long.
picking
a
merely
the best
or
will
70
the
The investor
the
portfolio
If he is
but
invested,
percent
I make is that
of
as readily
short
be long.
always
direction
down?
go
example,
he may be only
market,
The second distinction
market, or stock,goingup
involved
fund\342\200\224will
concerned about the
primarily
about
investor\342\200\224for
a trader
market.
is
Is the
is more concerned
stocks to invest in. Thereisnovalue
judgment
between traders and investors, it is
focus
for this book. In
of maintaining a certain thematic
in my distinction
matter
any case, on both counts,
To get back to my original
I would
certainly
question:
qualify
you
How would you
as a trader.
define your
philosophy of trading?
or reporter
with
is how he 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 will
are
no
longer so.
they
the
with
general
I feel
until
example of variant perceptionin
those
play
the
that to make money in the markets,
to get in the
you have to be willing
I
of
have
tended
to
short
stocks
that
were
favorites
way
always
danger.
and backed by a great deal of institutional
enthusiasm.
Generally
current
of
when we losta lot
and months
months
for a year and a half. Therewasa period
Genentech
in that position. But
of money
short because I continued to have a variant
I stayed
about
perception
the
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
biotechnology
will produce many
that
company
revolutionize the
will stay short.
That is a clear example,
but
short
a stock because of your
a question.
raises
it
products that
as my view is a variant
As long
industry.
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
here.
in conflict
trading principles
There are certain
and
started
exist in the world
peaked
down\342\200\224that
you
shouldn't
stock
is already reflecting problemsthat
are
evident
However,
can
losses in
lot, it may
skew
is unchanged,
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.
I have never done it that
way.
My attitude
has always been
too
short
my
have usually
and, therefore,
early
positions.
If I short
the
started
and it goes up a
a stock
my exposure a bit, but as long as my variant
I'll stay short. If I'm wrong, I'm wrong.
Are you saying that as long as you think
perceive them, are unchanged,you will
much the position goesagainst
you?
perception
as you
no matter how
fundamentals,
tough
hang
trade
around
the position
Of course, if it is triple horrible, I might
to take the pressure
down a little bit. I would say, \"OK,this looks
awful;
I see nothing
but buyers.
and see if I can
Why don't I join the buyers
In a matter
of speaking, I dichotomize
I
make some money.\"
myself.
in my heart, but I try to separate
I believe
have a fundamental view, which
I may see in the market. So
the short-term
fervor and intensity
that
from
in
I might periodically
I
am
short
that
of
be
even
situation,
though
type
Right.
a buyer.
Might you actually go net
It wouldn't
based
long
between
fluctuate
just
position
and
short
fully
even remotely approachflat,
of the
and
negative
bearish
yourself by buying
flat?
is
type of buying
or 40 percent
that
because
take
20,30,
with it.
and trade
position
periods, or does your
those
during
on very short-lived perceptions.I might
necessarily
that.
understand
short stocks and you
For
short a stock until
shouldn't
already
sense,I can
of trading,
but I have not followedthem.
you
off with
If you are very
that
shibboleths
may or may not be accurate,
there is a general view that
tended to short
speaking,I have
marketplace?
We have been short
197
Steinhardt
Michael
short
in a particular
stock, but are not
hedge
on the industry, might you sometimes
in that group against your
stock
another
short
position?
I have tried that
What it tends
to do is give me two problems
instead
knowledge about the
relatively
your
skimpy
problem
but have generally found
at times,
because
second
stock
it to
be unsuccessful.
of one.
on the other side will
Usually, your
to be
tend
you are just grasping at it to use as a hedge. If
not address the
that
you need to hedge it, why
is so great
MichaelSteinhardt
198
rather than taking
directly
problem
on
a totally
separate position? Let's
stocks are roaring, so you
a paper stock and the paper
you
say
short
stock will go up
another
paper stock against it. Maybe your
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
are short
Michael Steinhardt
199
example might be: BeforeI get
A common
exactly where I am getting
risk controlrule,it could
I don't
No,
have any
elements of your
some
are
use
You
Charts
don't
just
on
buying
use charts
at all?
me blank.
leave
I don't look at
or strength.
weakness
I don't use charts.
or breakdowns.
breakouts
I don'tuse stop-lossordersor such.I don't
distinctive.
is so
[He adoptsa JackieMason-likespeech
at the stock. It has a fantastic chart. The chart has a baselike
pattern.]
and then if it goes up a little bit more, boy it is a real breakout, blah,
this,
blah, blah, blah. They all seem the same to me.
I look
But just from
a quick
and
By watching
an
easy
stocks
this
don't you use charts as
has
over the years?
a
stock
traded
see
where
to
way
informational
as closely
standpoint,
as I do, I getsome
of price
sense
levels,
there is 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
point,
some
Steinhardt
I went
say you know that a stock
from
to you how it went
matter
Let's
It makesno difference
has gonefrom
plaintiffs
the plaintiffs lost, the
stocks
wouldn't
go up too much,
never lost a case and winning
another
had
tobacco
companies
really be news. That
to
interesting
that
to $40,
$10 to $40?
wouldn't
of
fundamental
your
overlooked
some
one
my original
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 analysis is wrong becauseyou
unknown
wouldn't
It will
perception.
because
the
since
important
have
element?
to me.
Do you have any trading rules that
you
could
define?
That situation
happens
act the way
you think
day.There
Give me an exampleof
know
you
lose,
Liable for Contributing
lose anyway. A phrase
I won't
would
much I will
of a variant
Found
Group
\"Liggett
example
be much. Here it is [reading
it wouldn't
know what,
is an
see how
Going backto our
$10
stocks about a month
was
ago.
My reasoning
won the case, the stocks would go down a lot, but if
the tobacco
short
if the
that
uptrends, ranges, and all that.
it
think
philosophy?
trading
rules about
any
don't
of the other
At
Nothing that
I know
have to be a
a position,
stops or objectives. I simply
in those terms.
what
Besides the variant perceptionconcept,
into
necessarily
be\342\200\224
about
rules
It doesn't
out.
a trading
rule.
responsiblefor.
are
many
fairly
often. You buy
I go through
or sell
it should.
stocks in the portfolio that
For example,
someone else is short
my
I am
Time,
a stock and it doesn't
six times
not directly
portfolio
Inc.
a
They are short
MichaelSteinhardt
200
business is lousy, and this or that. But the stock is
it. I will
acting really strong and is up 10 percent from where we shorted
Life position and ask
for
the Time
go over to the person responsible
is going
are we going to get something that
When
severalkey questions:
When is something going to happen that will ease
to surprise the world?
is ripe for a takeover?
the feeling that this company
If there is a
monitor of the portfolio.
I
a
am
a
In sense,
negative
That makes
it
I
will
regularly.
very
go through
problemwith a position
when
to
I
talk
because
things
people
only
difficult
mea
person here,
the magazine
because
very
are
or when their
lousy
If a stock
that
be
stocks
acting like they
are not
is not acting like
type of market action that
based
it should
the
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 the questiontoo simply.
Assume
you wanted to be
tobacco
stocks
as a longer-term position and the market
shruggedoff today's news and closed higher tomorrow. Would you
short the
cover
then?
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
to take
advantage of it and
sell some
more.
should.
on its fundamentals,
would
Steinhardt
Michael
was.
So you wouldn't care if the market didn't react to the news the way
should
as long as you felt the main reason for being
have,
short
was still valid.
it
Yes, but
if the
understand
variant
news was terrible and the
why. Sometimes
action is really telling
But haven't
the
you
market
stocks
has
were up, I would try to
more information and the
something.
there been instanceswhereyour
analysis
was
completely
wrong?
What
The
if you can't
explain it?
might
explanation
Sure.
be superficial
or serious,but
you
can usually
get
something.
And you realized it
At
this
conversation
explains
I would cover it anyway.
I would
So oncethe news is out,
the
That
down
the road?
Yes, and not necessarilysoquickly.
of the tobacco
companies. On balance, the
Let's take the situation
bearish.If the tobacco
sounded
close
the
out
after
news that came
and
then come right back,
tomorrow
stocks
go down only modestly
would you cover your position?
Right.
somewhere
was
game
cover the
position
is over for you.
the only reason I was short.
call in which his side of the
point, Steinhardt gets a phone
is filled with non sequiturs
and deliberate
mumbling. He then
to me his occasional habit
of playing
practical jokes on callers.
on the news.
For example,I get a call from a broker who I haven't
spoken
and
then say, \"Buy
long time. I swooshsome papersaround
shares of ZCU [mumbles another sentence].\"
Didyou understand
I said?
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,
That is exactly right, but
me back, and I have my
another
mumbles
it sounded
tell him
sentence]
and hang up
before
he can
else.
say anything
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
happened
The flexibility
aggressive
fund is often labeled asa
differently
than
mutual
a typical
hedge
fund
because
fund. Could you
it trades
very
elaborate
on
the
meaning of a hedgefund.
The
A.W.
has been given credit
the term referredto a precise
Jones Group
fund.
Originally,
the following:
said
essentially
for being
concept,
the first
which
hedge
management do not
the ability to forecast trends in the stock market, which are
have
are largely
functions of a host of variables that
beyond the consistent ability
we as money managers can do,
to anticipate. But, what
of individuals
as to which
is to make accuratejudgments
careful
analysis,
through
if
one
balanced long
not.
are
those
that
versus
well
So,
companies are doing
with short
to
be
were
strong
relatively
perceived
positionsin stocks that
risk
would
be
market
the
to act poorly,
positions in stocks expected
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
Doesanyone
still
trade
We in
that
the
world
of money
way?
The term
No, today, the term hedge fund is somewhat of a misnomer.
in which the general partner is
now refers to a limited
partnership
traditional
to more
money
on a performance basis, as opposed
typically paid
of a
the
assets
on
are
manager
who
managed.
Typically,
paid
managers
a traditional
than
money
hedge fund has a great deal more flexibility
to the original conceptof
of the
entrepreneurs
a hedge
fund?
attracted
numerous
hedge fund structure
young,
in the 1960s because it allowed
them an
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.
opportunity
Your
203
to
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
seriously
So they
ask, \"Where
were
hedge
is the
funds
Correct.They
wouldn't
embarrassed
the name.
trading
were
hedge?\"
in name only?
call themselves hedge funds;
they were
The term had a connotation
of being
short, and
the short
side had an anti-American ring to it. It was as if
you
for disaster. So they started
rooting
using the term [he adoptsa tone
of mock
by
even
private partnership.
pomposity]
Ironically, today, with
seculartrends of the
the
disintegration
and
1950s
of the
relatively smooth
1960s, the concept of a true
it did in its early
days. Why
fund may make more sensethan
there
of the hedge fund
any practitioners
concept
in its
pure form?
Becauseit is a very restricting approach. The premiseof being
long and a dollarshort
dollars
ineffectively.
How
in some
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
be? They are both affected
have to put up some
dollars
related entity requires using
hedge
aren't
you
Michael Steinhardt
Michael Steinhardt
204
be lucky to realize a 10percent
may
year\342\200\224that is,
a period
over
difference
of a
you are right.
assuming
is a group we are
How does your own
fund
the hedge fund
fit into
is used
shorting
about 40 percent.
mean
You
mutual
the
that
doubt
that the most conservativeof
flexibility
One
typical
during
have
been
40 percent net long. What
about
range
encompass?
net short
I rememberbeing 15or20percent
net
100
over
time, being
long.
percent
Yes.
less
than 80 percent
years.
So you have the
flexibility
of being
perhaps
meaningful\342\200\224sometimes
investment management
at one point, and, at another
net short as well as net long?
things I would emphasize about
shift market exposure so as to make
of the
to
Does
that
selection
as
No,
I was
sometimes
imply that your main profitability comesfrom
to net exposure adjustments for
in the broad market direction?
opposed
being a bit
facetious.
arsenal.
too
our
approach
it an
meaningful\342\200\224tool
is its
exceptionally
in
It is more
not a big advantage like being right
approaching
80
than
percent
stock
anticipated
edge, but it is
of the time, or anything
a 1 percent
that.
speaking, how important is the bias of the
direction versus stock selectionasa contributing
factor
overallsuperior
funds has had an average exposureof
On average, you
does
net long?
I would
last twenty
some
variables, with
Relatively
40 percent
Yes. In contrast,
to say that there are a host
of
except
more important
and they change
than others,
all the time. Having done it as long as I have gives me the opportunity
to be 51 percent
rather than 50 percent right.
right
It is really beyond definition,
changes
concept?
actively. We always have some
shorts.I also spend a good deal of my time thinking about net market
for it. In the twenty-one
exposure and risk, and planning and adjusting
here has averaged
our
I
been
overall
have
that
this,
exposure
doing
years
It fits in the sense that
outlook for the general market
a very critical element of your approach?
your
is obviously
associatedwith
in shorting
specializes
determine
that
direction, since
on the West Coast that
stocks.
The
has been mentioned
thought
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,
There
How do you
205
market
right
to your
performance?
As I look back on
of
past twenty-one
years, there is no set pattern
In some years, we did particularly
well
on the
In other years, we did
stocks.
strength of a few well-chosen
well
because
we
were
on
the
side of the market. For example,
exceptionally
right
in 1973-1974,
when the market went
down
we were up
enormously,
because
we
were
net
There
were
other
short.
substantially,
largely
periods
when the bulk of our money was made in bonds.
I think there is a
who thinks he can
message in the fact that there is no real pattern:
Anyone
formulate
success
in this racket is deluding
it changes
because
himself,
too quickly. As soon as a formula is right for any length of time, its own
successcarriesthe weight of its inevitable failure.
successful
What
short
the
activity.
made
you sufficiently
in 1973-1974?
our
The anticipation
of a recession.
confident of lower stockpricesto go
net
Michael Steinhardt
206
Michael Steinhardt
the crowd must always be right.
Well,
against
There were plenty of contrarians who bought
on what?
Based
I felt that the higher
interest rates, which,
inflation
in rum,
rates of that period
would
lead to higher
would slow down the economy.
was
you negative
major 1982 bottom
on the stock market in
as
the
well?
and
But
in 1981
and 1982,1 made an
enormous
amount
of
notes.
position in treasury
Although one
it was
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
money
by
a leveraged
having
couldn't predict the
end
of the
lower
in order
to be competitive, stocks had to sell so much
on which
they were selling at that it wasn't even worth
focusing
stocks to buy\342\200\224although you might focus on the short side. What was
I assume
a while
of a turn in interest rates in
in that
was the inevitability
period
it was simply a matter of timing
for anything else to be worthwhile;
had a clear
turn. In contrast to most other periods, this
period
that
fixed
income
securities were by
message: U.S. Treasury
of
the
time.
far
value
had to look at
with any sense of contrarian
mentality
Anyone
a potentially
in the early 1980s as presenting
interest
rates
great
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
unidirectional
the quintessential
topping
So,
in the
some
rate of inflation.
of the pieces of the puzzle werealready
Yes, and that is as much as you
in place, it is too late.
can
hope
You mention a contrarian mentality,
have
justified
trying to pick a top at
when
that
in
that
but
much
that
lower
way.
rates
and 9 percent, and 10percent.There
bonds at what were then
people
buying
important
difference
between being a theoretical
terms. In orderto win as a
with it in practical
probably
trade.
you
had the market run against you
for
quite
it did. It was a very painful period, becauseas far as most of my
investors were concerned,I was an equity investor. What did I know
about
Who was I to contradictHenry
bonds?
who was telling
Kaufman
the world that interest
rates were going to the moon? Not only
I
was
than in the past, which
raises
doing something that was different
always
the antennas of investors\342\200\224particularly
those
with an institutional
I was doing it in an enormous size.
mentality\342\200\224but
Right,
Were
you
more
leveraged
they
are all
than 100 percent on
your
position?
can speculate: it is called margin requirements. But in treasuries,
you can
finance as much as 98 percent of your purchases,
on maturity,
depending
so thereis no
type of thinking
interest
I had three to four times the firm's capitalin five-year
Yes, at one point
In
maturities.
stocks, you have a policeman who tells you how much you
in place?
for, because
when
psychology.
securities,
order
bonds
and
right timing
you have to put on a position in
the appropriate size.If you do it too small, it's not meaningful;
if you do
it too big, you can get wiped out
if your timing is slightly
off. The process
and
of your
an understanding
own
requires courage, commitment,
than
unique
dealing
need the
you
contrarian,
Not as strongly.
time,
work that
life doesn't
yields.
high
There is a very
contrarian
first
deal of money lost by
a great
the
preceding
period
for the
to 8 percent
went
all-time
Were
207
real
constraint.
could
rates.
Absolutely. People think that being a contrarian implies victory. After
but someone
that goes against the crowd. It is
all, what is a contrarian
a cliche that the crowd is always wrong\342\200\224so the guy who stands
almost
started
long was the period between when
you
the
treasuries and
market bottom
rate peak]?
[interest
How
I started buying
in the
September 30,1981.
spring ofl981,andI
think
treasuries
buying
bottomed
on
208
How
Michael
did rates move against you
much
I don't recall,but
the size of my
rates
in
that
first half year?
up enough to be painful,
went
foray in
you
treasuries,
substantial losses.Didn't you
have
trader.
Here
on
out by incurring
of self-doubt?
started
periods
Did that
prove to be the
to much
higher
ever
come
at least
close to saying, \"MaybeI am
wrong,\"
and
your position?
decreasing,
multiples,
all cases, I would
in almost
have
been
better off sticking it
out.
1987was one of the
that October
mentioned
You
worst
market
But I
Obviously, you had lots of company.
find it surprising,
have
you being such a contrarian. I wouldn't
to be heavily long in a year with such bullish euphoria.
expected
you
in your
experiences
or
because stocks eventually went
move,
or would you have been better off if you
right
had held 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
liquidating,
of money.
position.
your first major
Did you
because we were losing a lot
we did,
times
At
209
backed off during that period?
So you
given
especially
this time, you had primarily beena stock
Up until
Michael Steinhardt
Steinhardt
What
career.
happened?
No, never.
One
of your
seemsto be that
basic principles
as
long
as you believe
a position.
Have
you will stay with
right,
you are fundamentally
in
markets
which
didn't
there been any exceptions\342\200\224that
is,
you
view, but the loss just got too big?
change your fundamental
have
There
been
some
situations
have enough courageto hang
when
in with
I was short and simply didn't
the full-boat of the position.
That
at the height of the \"Nifty-Fifty\"
of
October1987,that was probably the
phenomenon.
life. At the time, there was a theory
that
worst period in my investment
as long as a company continued to sustain
substantially
above-average
was
particularly
With
true
in
1972,
the exception
growth, it didn't matter how much you paid for it. Many growth
were
short
Polaroid
traded at multiples that
stocks
just crazy. We went
times
which we thought
was
when it was selling at sixty
earnings,
market
to lose
it then went to seventy times earnings.The
seemed
absurd;
is the difference
and we found ourselves asking, \"What
track of reality,
and eighty times earnings?\" By putting
a
between forty times earnings
rate
could
number on the secular
different
estimate,
growth
you
justify
in those days.
almost any multiple That is how people were
thinking
secular
in the spring
of 1987,1
wrote a letter
Actually,
I
the reasons
and
was
cautious
why
substantially
market.
Having
was trading
a level
in
the
the
at
occurring
continuous
reduction
with
in
the
money,
my exposure
issue wasa unique
American
equity
the
market
I came to
combination
markets\342\200\224a
of
substantial
of equitiesoutstanding,
coinciding
As long as banks were
the junk bond market
was
and corporate
good,
in the amount
a more liberal attitude
comfortable
lending
reducing
done that, I kept thinking about why
that was too high by historic
standards
that the quintessential
conclusion
phenomena
to my investors stating
debt.
toward
managers saw repurchasingtheir shares as the right thing to do, I felt
there would be an unusual upward bias to equity prices. That to me was
the
most important reason in the seeming
overvaluation
of stocks
single
that
existed
most of 1987.
through
Therefore,the
this
situation?
question
important
The answer
was: What was going to change
was a recession.And
whenever
would come, its impact would be horrendous
because
didn't have the flexibility
to fight
it since they
had
countercyclical fiscalpolicy during
fall
of 1987,
not
strengthening\342\200\224so
only
much
was
the
the
expansion
that recession
the government
deviated
from a
phase. But during
not weakening, it
economy
so that the Fed tightened.
the
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
that
but
a
decline.
created
have
a 500-point
of history, what was the significanceof Treasury
Secretary
as to the
criticism of Germany?It was merely
a disagreement
of
In
valuation
a
event.
currencies\342\200\224hardly
retrospect,
proper
unique
to the real world after October 19? Almost
what
So,
nothing.
happened
was internal to
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
In the
light
Baker's
How then do you
explain
nature of the October19price
extreme
the
break?
was the combination of
of the markets'
and
an
inability
changes
relatively
to
deal
with
the
occurred
institutional
mechanism
changes that
mostly
The elements of stability\342\200\224the individual
investor
the 1980s.
and
during
the specialist system\342\200\224had been greatly reduced in importance.
The
that led to the
problem
Do you believe portfolio
[Portfolio insurance is the
risk
exposure
Appendix
1 for
more detail.]
That was one of the new
the elements of stability.
sale
of stock
in a stock portfolio as
insurance,
the other
decline?
index futures to
pricesdecline.
See
On one hand, you
elements.
On
the
exacerbated
insurance
systematic
reduce the
1980s\342\200\224portfolio
19 collapse
October
world
real
modest
had
a reduction
the creations
hand, you
had
trading,
and global asset
program
in
of the
a unidirectional impact. By that, I mean that
tend to be buyers and sellers at the same
participants in these strategies
was not prepared
time. The stock market
to handle it.
tended
allocation\342\200\224which
Where
were
I came in very
my exposure
to exert
you, positionwise,
much
during
long
the
coming in on
exposed\342\200\22480
day.
October
Why?
Were
still bullish?
you
was the real
might
not
could
events
211
Michael Steinhardt
Steinhardt
Michael
19?
to 90 percent\342\200\224and
I increased
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
with
stay
No, I reduced
long position?
the next two
it throughout
and
decline
your
the extraordinary
it was
affected me as well. I thought
with a lot of cash rather
than
situation
Did you think
that
your
months.
change in confidence
basic
The
magnitude of the
it engendered
that
better to sit back and rethink
try to hang in.
the
premise for being long wasno longer
valid?
that I had underestimated the
I thought
diminished
market
percentage
loss
I was down
20 percent
for the
As you
of the
forces
during
had
October 1987?
month.
are
there
look back on the October1987experience,
that you believe you
There is a very
that
stability.
What was your
over
impact
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.
to the
212
The
typical
you
think
Yes,
mutual
that
although
adheres
to a buy-and-hold
is basically a flawed
strategy?
fund
concept
flawed isn't quite
the
approach. Do
I would use. I would
word
Michael Steinhardt
Steinhardt
Michael
say
it is
213
How
did you get started as a fund
When
I first
If you
had very little
I probably
wasn't
I guessso,but
less
category.
More and more peopleare
before.
than
fall into that
terribly
market
well,
but because
Do you think
The
not that
timing,
the
mutual
fund industry
mutual
the investing public to find
fund
of
enough to the whims
will meet contemporary needs.
sensitive
is certainly
products
is going to change?
industry
that
trading background.
handle
a losing
answer or
so many other questions in this business,
there
formula.
There
is nothing that can be articulated
enough to lead others in a certain
is no pat
minimum
precisely
first
applies.
Correct.
from
do
you
time?
trading
years.
Have you
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,
At the time, the
shares at 6\\. The
a dollar
twenty
that
Brooklyn,
amount
was at 7, and the
than
the
over
The institutional
to today.
I remember once a trader
direction.
In other words, one losingperiodmay be sufficiently
different
from
another so that, even for yourself, there may be no generalwisdom
of intellectual power on
compared
started
Central.
that
other two.
as the
You have traded the stockmarket for
noticed any significant changesduring
was minimal
period?
for
an analyst
as good
did you become the trader?
I can't
a gambler all his life. Although
has been
remotely
My father
I
there
is
an
element
of
in
this
business.
feel
it,
Maybe
justify
gambling
I got that talent from my father.
kids
typically
As is true
why
experience,
Even in those early years, you did very well asa trader.How
benefit
of experience?
think you managed that without
The amount
Howdo you
cyclical
paying
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
an
goods
My business was started with two other
more
became
fellows who
were also analysts. As our businessgrew,
trading
the
little
became
the
trader
for
had
I
firm,
having
very
important.
Yet, the vast majority
funds
had
and
equipment
Rhoades.
at Loeb
a strategy.
The objective of participating
in the long-term
to suffer
growth of American equities, willing
through those periods
is fine, but it leaves so much on the table in terms
when
decline,
equities
of potential professional management. It is an incomplete
strategy.
of all
an agricultural
I was
analytical
background.
analyst
too limiting
in the late 1960s,I only
business
this
got into
trader?
seller
stock
didn't
needed
was
to sell
700,000 shares of Perm
in Chapter
already
bother to check the
seller was relieved to sell that
board.
amount
under the last trade. Meanwhile,I turned
the 700,000 shares at
that price. I madea half
of twelve seconds.
6\\.
I could
million
11. The last
I bought
trade
700,000
at less
of stock
around
and
sold
have sold three times that amount
at
dollars
on that trade, and it took me all
214
How
long did that
Until
the
the
competition;
environment last?
tape in 1975. Now there is a lot more
on the trading
desks
are much brighter. Another
consolidated
people
greatly
The
change
products.\"
Perhaps
the
much more short
are
investors
now
important
oriented.
term
The
traders.
change is that the world has become
All sorts of people who used to be
now
institutions
define
to predict
secular
trends has greatly
be typical to see a report
McDonalds' per share earnings
up
it would
by
to
as
themselves
enterprises whosegoal is to achieve the highest rate of return,
used to define themselvesas long-term
investors.
People's
in their ability
diminished.
when
they
confidence
In 1967,
a brokerage
firm estimating
the year 2000. Those people
long-term earnings because companieswere
and predictable way. They believedin America
and
to the same type of
steady growth. Today, stocksdon't lend themselves
they
thought
could
estimate
in a stable
growing
secularanalysis.
The
in
the
of secular growth trend
not having worked
analysis
and 1980s relates to the question
of trading. In the 1950s
implication
1970s
and 1960s,the
heroes
were
the long-term
the wise guys. There are peoplelike
investors; today, the
Goldsmith,
who
heroes
are
lauds the virtues of
capitalism.He talks about \"what I did for Goodyear.\" What
for Goodyear? Hewas in there for seven months, made eight
did
he do
zillion
and left the management after taking
He talks
himself,
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.
dollars for
What
would
of takeover laws; the
reinterpretation
Department's
what
is and is not
monopolistic.
be the most important
advice
you
could
give to the
layman?
is that sometimes the greatest
allures of this business
it creates the
because
do very well. That is unfortunate
to do well,
that you don't necessarily need any
professionalism
impression
is:
and that is a great trap. So the major advice I would give anybody
and
when
that
is
that
this
a
business,
you
competitive
Recognize
very
with people who have
to buy or sell a stock,you are competing
decide
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
on balance,they are going to beat you.
One
most
Justice
definitionof
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 referring
What
retail buyers and sellers have diminished
is that
MichaelSteinhardt
Steinhardt
Michael
of the
ignoramus
Is the
can
implicit
that, most of the time, the
message
be better off having
his
money
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
Steinhardt
Michael
a higher rate of return
because
they
are more risky. That is not true. They
Michael
demonstrated by the equal ease at which he goes short or long, as well
than stocks when warranted
other
as his willingness to trade markets
by
are more risky; therefore, you have to be convincedthat you are going
to get a higher
rate of return in order to play the game. Don't assumethat
in some mutual
rate of
by investing
fund,
you are going to get a higher
his perception
return.
trading,
table\342\200\224shorting,
Isn't that true, though? Historically,hasn't the
beat
interest
rate returns?
market
stock
True, 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.
of the
fundamentals.
hedging,
\"The
participation
off you
of good trading?
elements
the
are
Goodtrading
is a peculiar
ideas and the flexibility
You
to believe
need
to be wrong
confidence
to
humility
recognize
in something,
a considerable
and
balance between the
number
but
trade.
Always
of times. The balance
is best learned through
ask yourself:
know that I don't? Finally,
yourself and
others.
you
Why
have
In my judgment,
to follow
your
when you have made a mistake.
at the same time, you
are going
mistakes. There should be a respectfor
the
conviction
does
extensive
the
person
he want
to be intellectually
between
and
experience
on the other side of
to sell? What
honest
does
he
with
all great traders are seekersof
truth.
But
perception is basically a contrarian
approach.
by just using sentiment survey
numbers or other
measures of bullish
The markets don't pay off
consensus.
that
sentiment
is
at tops and very
easily.
Although
always very bullish
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
Steinhardt's
you can't
variant
be a successful
contrarian
bring
to the
market
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
position in
treasury
I have
noticed
notes during
1981 and 1982is a perfect
example
of this
characteristic.
Conviction is probably an important
What
more things you
in bond markets, futures
and so on\342\200\224thebetter
One trait
significantly
217
Steinhardt
essential
to the
amazing
resolve
contrarian
trader.
in maintaining
Steinhardt
quality
for any trader,
but
it is
has repeatedly demonstrated
difficult
times, as
large positions during
was still right. Witness his convictionin
he
long as he was convinced
his
note
with
positionduring the six-month climax in
treasury
staying
immune not only to the market move
interest rates in 1981, remaining
to
the
but
also
him,
psychological pressures of complaining
against
into treasuries
after a career
his sudden transition
who questioned
investors
his
it all, Steinhardt held on, and evenbuilt
asa stocktrader. Throughout
his
he
was
Without
that
convinced
because he remained
right.
position,
would
never
heard
world
have
the
sense
of conviction,
probably
strong
of Michael
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
O'Neil
William
comprehensive
of the
most
stock market information
respected securities research firms
computerized
highly
and
in
William
O'Neil
I think
it would
today is one
the country.
William O'Neil and Co. servicesmore than 500 major institutional
accounts
and 28,000
individual subscribers to their Daily Graphs
charting
service. The firm's data base contains
120 different statistics on eachof
7,500securities.
as
book
of the year.
best-selling investment
O'Neil's various business ventures
not impeded his
have
performance as a virtuoso
stock investor. During
the past ten years, O'Neil has
over
a 40 percent profit
on his stock investments.
averaged
annually
Some of his biggest winners were the Canadian oils during the 1970s
and Pic'n'Save and Price Co. during
the late 1970s and early 1980s.
O'Neil's
most
famous
market
calls
weretwo full-page
Wall Street
Perhaps
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
is not
single
himself
out for any
special
rarity among chief executiveofficers,
privileges.
he
shares
In what must
surely
his office with
two
impressed me as being articulate,
employees.
O'Neil
opinionated,
and very bullish
on
America.
be
a
and original. Where did you
approach
first
your
develop
trading ideas?
I went
what
launched
be fair to describe your stockinvestment
individualistic
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
221
few
the same
through
process
do. I subscribed to a
people
that
do too well. I found
most
that
and most of them
letters
investment
didn't
like buying low-priced stocksor stockswith
theories
(P/E) ratios were
not
very
did you first find an approach that
When
low
price/earnings
sound.
worked?
of the people that were doing very
in 1959,1 did a study
the market. At that time, the Dreyfus fund was a very small fund,
Back
only
managing
about
doubling
the
$15 million. Jack Dreyfus,who managed
of all of his competitors. So I got
results
the fund,
copies
in
well
was
of their
plotted on charts precisely where
reports
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 quarterly
to a new high
it went
price.
So the first thing
to
buy
stocks
price base. You
the preceding
move so that
you
don't
are
new highs
to make
beginning
to find the beginning
trying
waste six or nine months
sitting
to
relative
of a major
in a stock that
is
nowhere.
going
I studied the
the
I examined
ratios;
real
stocks
characteristics
successes.I didn't
the
about how to get superior performance
that are near their lows, but to buy stocks that are
I learned
out of broad bases and
coming
find
and
world
just
that were
big winners
they had in
common
limit
myself
years and tried to
they became major
in past
before
to preconceived notions like P/E
a model based on how
a lot of variablesto develop
worked.
Can you describe this model for
picking
winning
stocks?
other
confident,
CANSLIM.
I use the easy-to-remember
acronym
chief
characteristics
one of the seven
represents
Each
of the
letter of this
all-time
name
great win-
222
William
stocks during their
huge advances.
ning
The \"C\"
current
their
over
quarter
stages, just before they
earnings per share. The
a 70 percent averageincreasein
the same quarter
amazed
major advance. I am continually
and even pension fund
managers,
or lower
reasonfor
research
to go up
demonstrated,
the
rapidly
earnings? So, our first
earnings per
current
a stock
they advanced
share
The \"A\"
million.
best
formula
year before they began
by how many individual
stocks with
buy common
There
earnings.
current
by
at least
for mediocre
settle
rule in stock selection is that
quarterly
20 to 50 percentyear
stands for annual
earnings
per share.
In our
annual
studies, the prior five-yearaverage
compounded
earnings growth
rate of outstanding
stocks at their early emerging stage was
performing
24 percent.Ideally, each year'searnings
over
increase
It
average
share
should
show an
the prior
is a unique
earnings
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,
earnings increase
per
the past two
during
and compares
percent
earnings
An
EPS
rank of 95 means that
quarters
combines
a stock's
percent
with the past five-year average
that figure to every other stockwecover.
a company's
current and five-year
historical
have outperformed
95 percent of all other companies.
earnings
The \"N\" in our formula stands for something new. The \"new\" can
be a new product or service,a change
in the industry,
or new
management.In our research
we found
that
95 percent of the greatest
winners
had something new that fell within these categories. The \"new\"
also
refers to a new high
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
investors handicap themselves by restricting
large-capitalization companies. By doing so, they
some of the best growth companies.
to only
purchases
eliminate
The \"L\" in our formula stands for leader or laggard.The 500 bestthe 1953-1985
stocks during
period had an average relative
of 87 before their major price increase
[The
actually
began.
strength
the past twelve
a stock' s priceperformance
measures
relative strength
during
a relative strength of
months compared to all other stocks.For example,
performing
80 would
stocks
to
that the given stock outperformed 80 percentof all other
rule in stock selection is
basic
the
past year.] So,another
during
mean
the
pick
leading
avoid
values\342\200\224and
to year.
223
institutional
Many
automatically
for the
earnings
why should anybody
in price,
basic
best
is absolutely no
are
earnings
poor. If, as our
stocks had large profit
increases
before
quarter
if the
should be up
in our
made
the prior
in
investors,
unchanged
William O'Neil
their
for current
stands
showed
stocks
performing
developing
early
O'Neil
relative
with
companies
the formula stands for institutional
\"I\" in
The
institutional
ones
with the high relative strength
I
to restrictpurchasesto
stocks.
tend
the laggard
strength ranks above 80.
stocks\342\200\224the
by far the
are
buyers
Leading stocksusually
institutional
some
backing. However, although
is not,
is desired, excessivesponsorship
institutional
have
sponsorship
it would be a sourceof
because
the company
or the
market
institutional
stocks
can
large
in our
selling
if anything
went
with
wrong
in general. This is why the most widely owned
a company's
be poor performers. By the time
is so obviousthat
performance
too
late to buy.
probably
The \"M\"
largest
The
sponsorship.
of demand for stocks.
source
formula
almost
own a stock, it is
all institutions
stands for market. Threeout of four stocks
in the market averages.
and volume on a
price
move
will go in the same direction as a significant
That is why you need to learn how to interpret
daily
basis
for signs
At any
given
time,
has topped.
market
less than 2 percent of
restrictive
because
recruiting
players
of .200hitters,
you
want
to pick
for a baseball
or would
you
try
only the
very
is
best.
I guess
actually
you
have
a high
trades?
over the years, about two-thirds
closed
were
team, would you pick an entire lineup
as possible?
as many .300 hitters
process,do
of winning
deliberately
If you
to get
Since you use such a restrictive selection
percentage
in the entire
stocks
the
fit the CANSLIM formula. The formula
will
market
that the
of my
at a profit. However, I have
stock purchases
found
that
were
only one or two
224
O'Neil
William
of every ten I have bought
stocks
have
out to be truly
turned
rally is vulnerable. Second,volume
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
tops,
initially
out. You can buy
break
never
buy when
base, the
buy
it is very easy to get shaken out
and
the right time, the
7 percent
maximum
You have stated that
or
figures\342\200\22480
to
vulnerable
as
of 99
strength
the
higher.
theresucha thing
relative
as well as too late. The
least probability
of a loss. If you
frequently fluctuate 10 or 15percent
will
stock
at exactly
to my
soon
is the
there
trading action,
too
a sharp
stock
a stock may
because
a base
is usually
buy
idea
is to
within
the
But if I
not going to go down
stop-loss point.
superior
stocks
relative
way
strength
Although
high relative strength is good,is
it being too high? In other words,might
a
indicate that the stock is overextendedand
correction?
has taken
place
the direction of the
topped. Another important
discount rate. Usually, after the
has
Reserve
on the way up.
market
is to
general
to watch
factor
Fed
raises
is the
of New
number
or three
indicator
to
the
line illustrates
York Stock Exchangestocks
advance/decline
[The
top.
the total
between
difference
Federal
the rate two
times, the market runs into trouble.
The daily advance!decline line is sometimes a useful
the number declining.] Frequently,
the
and
fail to
behind
the
market
averages
lag
new
This
indicates
after
the
reach
highs.
averages
penetrate prior peaks
in the market advance.
that fewer
stocks are participating
each
advancing
versus
day
will
line
advance/decline
have high
the distribution
to determine
watch for signs of a market
in normal
the position.
of
is
there
days, but
focus on how the leading stocks are performing. If the stocks that have
been leading the bull market start breaking down, that is a major sign the
market
a breakout from
to anticipate
want
don't
since
Another
for several
surges
closes.
upside
price progress as measuredby market
when the market
there may not be a pickupin volume
very little, if any,
In this latter
case,
outstanding.
You
225
O'Neil
William
When you believe that
the
phase,would
going
you
advise
market
has entered a bearish
rather
than
short
merely liquidating
general
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\"
in the CANSLIM
formula makes sense sincefew stocks
a general bear market. However,
that
rule sounds
easier
in theory than in practice.
After
all, how do you tell the difference
a market top and a normal
between
bull
market
correction?
can
buck
Top formations in the
First,
the
average
Thistells you
that
market
occur in
one
of two ways.
averages
only
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 peopleto
sell
traders.Sellingshort
is quite
belowthe
base,
there
will usually be severalpullback
base will
now
provide
an area of overheadsupply,
bought
zone will be losing money, and a number
in that
eager to get out
also provide
attempts.
as
near
good
breakeven.
timing
Therefore,
for short sales.
The prior
all investors
of them
who
will be
pullbacks to failedprice bases
226
Does
William
of unlimited risk present any
the element
special
problem
in
short selling?
No, becauseI never
take
unlimited
risk. If a short position
goes against
me, I will be out after the first 6 or 7 percent loss. Before you sell any
stock short, you should
decide the price at which
you will cover that short
if
a
loss
occurs.
position
CANSLIM
selection process,
risk
formula,
control
overall strategy. Can you
which
is critical to your stock
in your
role
obviously plays an important
element
of
a little bit more about that
talk
trading?
My philosophy is that all stocks are bad. There are no good stocks
unless they
instead, you have to cut your
go up in price. If they
go down
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
second-guessing,
no hesitation.
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
doesn't really understand
the philosophy
of cutting losses quickly. If you don't have a rule like
in bear markets
like 1973-74, you can lose
cutting a loss at 7 percent, then
in that
70 or 80 percenton your holdings.
I have seen people go bankrupt
type of situation.
probably
should
most
If you
investors.
aren't
not buy
The public
willing to cut
stocks. Would
your
you
losses
drive
short, then you
your car
without
brakes?
book, I repeat a story told by Fred C. Kelly, the author of
of how the
Why You Win or Lose, that provides the best exampleI know
a selling
it
when
investor
comes
to
making
typical
procrastinates
decision.A man has rigged up a turkey trap with a trail of corn leading
a hinged
into a big box with
door. The man holdsa long piece of twine,
connected to the door, that he can use to pull the door shut once enough
into the box. However,oncehe shuts
wandered
turkeys
have
he can't
open it again
away any
Besidesthe
227
William O'Neil
O'Neil
turkeys
One day,
going back to the
without
the
would
which
box,
door,
scare
on the outside.
lurking
he had a dozen turkeys
in his box.
Then one walkedout,
there were twelve
string
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
eleven.
leaving
have pulled the
\"I should
when
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 properly. Jesse
Livermore
\"It is never your
that makes big money, it's the
said,
thinking
Second,
sitting.\"
top.
Therefore,
after you
not
be
sell.
upset
The goal is to make substantial
if the price continuesto advance
Your writings
people
you have to realize that you will never sell the exact
it is ridiculous to kick yourselfwhen
a stock goes higher
and
diversification,
disdain
express
consider
important,
on your
after
you get out.
of factors that
P/E
including
ratios, dividends,
for a number
is wrong
with
the conventional
start
with
P/E
thesesubjects.Let's
many
Could you explain
indicators.
overbought/oversold
what you think
stocks and
profits
wisdom regarding
ratios.
In my
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
the
of 10 when
of 50. During
because it is selling
at a low P/E ratio
we found there was a very
the
best-performing
started
they
thirty-three
stocks.
low
correlation
Some of these
their major advance; others
years in our survey period
228
O'Neil
William
at their
The final
William
[ 195 3-1985],
the
average
P/E ratio
for the
stocks
best-performing
P/E ratio of 15 for
end of their
early emerging stagewas 20, comparedto an average
the same time. At the
Jones Average during
an
had
stocks
these
expansionphase,
average P/E ratio of approximately
This means that if, in the past, you were not willing to buy stocks
most of the
eliminated
P/Es, you automatically
above-average
the
Dow
45.
with
mistake a lot of investors
A common
is to buy
make
the P/E ratio looks cheap.There
a stock
a very good reason
is usually
a P/E
Your thoughts
on
fact,
more
because they
they
pay
Diversification is a hedgefor ignorance.
I think you are much
better
off
a great deal about them. By being
owning a few stocks and knowing
very
you increase
those
your chances of picking
superior
much more carefully, which
performers.
stocks
is important
You
in
controlling risk.
How many issues
one time?
For an investor
you advise
would
with
one or two; $10,000,three
$5,000,
four or five; $50,000,five
the subjects
a typical investor
or
six; and
at any
to hold
or four;
$25,000,
$100,000 or more, sixor seven.
we have just discussed,isthereanything
you
consider
Most
investors
a stock's
percent
and
of investors
totallyignorant
understand charts. Even a lot of professionals
about charts. Just as a doctor
would
be foolish
X-rays and
EKGs,
pays
dividends,
the
have
to pay high
interest
rates
It
dividends.
to hold stocks that
is naive
If you
goes
down 25 percent, your
How
about
are getting
net
attention
a well-known
performance. In
weaker their posture
to replace
are
a 4 percent
yield
going
funds
paid
down because
dividend and the
stock
else
a major public misconception?
is a 21 percent loss.
to overbought/oversold
indicators. I oncehired
technical
really accelerated.
oversold,
that charts are hocus-pocus.Only
investors
would
be foolish not
about
what
averages
about
talked
using
were topping. Do you
trading individual
to use
is going on that
easily
any other way. They allowyou
in an organized manner.
stocks
to follow
5 to 10
about
are
not to use
charts. Charts
cannot
be
a huge number
of
volume as a clue that the market
also
use volume as an indicator in
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
were
obtained
Earlier, you
who specialized in such
was very oversold. Oncehis indicators
think
provide valuableinformation
different
indicators?
overbought/oversold
I rarely pay any
conventional
from
in
out in dividends.
most prominent
is diversification.
targets
Aside
a company
may
of your
list
dividends?
There is no correlation betweendividends
the
229
item on my
selective,
to
ratio is low. Many
beginning
ago, when I was first
years
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.
why
wisdom
can also watch
best-performing securities.
solelybecause
O'Neil
the market break
The volume
in a stock is a measure
is beginning
to move
at least
50 percent
into new high
over the
volume at a key point
is ready to move.
is an
average
of supply
ground,
daily
extraordinarily
and demand. When a stock
should increase by
in recent months. High
volume
volume
valuable tip-off that
a stock
230
William
can also be used in a reverse manner.
an advance, volume should dry
after
Volume
consolidation
words, there should be very
a consolidation, declining
During
little
In
substantially.other
market.
O'Neil
When prices entera
up
selling
very
coming
into the
volume is generally
constructive.
How
handle a losing streak?
do you
in your
CANSLIM
formula emphasizes the importance of
of the
market\342\200\224at
least
out
being
bear
Since most mutual
phases.
remain heavily
that
imply
on the
funds,
long side\342\200\224during major
very structure,
by their
throughout both bull and bear
mutual funds are a poor
believe
you
stocks
in
invested
markets,doesthis
as well\342\200\224they almost
recover
will
market,
most people get scaredand
plan. Actually,
long-term
holding
is down
sharply,
Would
it be fair to say that
like they
you should buy
when
have
to. Unfortunately,
decide
to switch,
a good,
diversified
in
ruining their
growth fund
more.
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
I mean, they
but liquidate
stocks,
salary.
to handle
how
is that most peopledon't know
investment,
problem
When
think.
not
to
sit
and
is
to
funds
mutual
in
to
success
them. The key
the
general
stocks
sharply.
that is exactly right.
Because
of the emotional
people
do in the market is wrong.
Along
that
is going
your
public tends to treat funds
and stocks like they should
funds?
tend
to hold on to their losers in individual
their mutual
funds
when they are down
individual
should
By that
Yes,
investment?
This
a bear
cash.
into
The \"M\"
231
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,
these funds
is
are doing
hit a losing streak, and it is not because what you
If you
have
If
bad.
be
market
you
going
may
wrong, that tells you the whole
if it is time to start
losses,
five or sixstraight
you want to pull back to see
moving
O'Neil
William
In my
book
are the biggest mistakes investors generally
line,
what
I have
a chapter on eighteencommon
make?
element, most of what
mistakes.
the
is how
in it for 15 years or more. That
need
the
to
do
in
But
that,
order
you
you will make the really big money.
The
markets.
bear
typical
four, or five
three,
courage to sit through
stock fund will go up 75 to 100 percent in a bull market,
diversified growth
in a bear market.
but it will decline by only 20 to 30 percent
you
buy
a fund,
you want
So you treat a fund
to be
very
differently
from
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
use good selectioncriteria. They do not know what to look for to find
successful
stock.
Therefore,
stocks that are not
market leaders.
acting
they buy
particularly
fourth-rate
do
not
a
\"nothing-to-write-home-about\"
well in the marketplace
and are not
real
account?
Very,
very
differently.
have a stop-losspoint,
With an individual
because
you never
stock,
you absolutely
know how far down the
have to
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-
William
232
O'Neil
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 even worse habit
up.
If you buy
a stock
down in your buying, rather than
out your
at $30 and average
more
buy
and
mistakes
losers
putting
good
by
your
is to average
at $40 and
then
cost at $35, you are following up
strategy
money after bad. This amateur
few
losers.
a
down
with
big
you
4. Thepublic
loves
it's
They incorrectly
100 or 1,000shares,and
feel
can produce
serious losses and
weigh
at low prices per share.
wiser to buy more shares of stock in round lots of
more important.
this makes them feel better,
perhaps
to buy cheap stocks selling
be better
off buying
price!
and markups to buy low-priced
stocks can drop 15 to 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
costs more in
usually
and your risk is greater,
It
stocks,
higher
commissions
since
cheap
O'Neil
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
company's past
inferior.
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.
8. People
Just
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
William
because
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 want
or
the necessary study and preparation
too fast, without
doing
to
for an easy way
essential methods and skills. They are looking
what
or
effort
time
learning
make a quick buck without
really
any
spending
much,
the
acquiring
they
are
losses
when
investors
majority of unskilled
the losses are small and reasonable.
12.
doing.
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
is correct,
the stock ironically
will,
in many
cases, go down
in price.
stubbornly
In a similar
vein, investors
procedure.
Investors
is exactly
will sell a stock with
hold onto their
They could get out cheaply,
and hoping
they keep waiting
but being emotionally involved and
human,
until their loss gets much
and costs them
bigger
hold their losers. This tactic
tip
to them.
in price.
5. First-time
too
is
dearly.
in small, easy-to-take profits
and
the opposite of correctinvestment
a profit before they
will sell one with
cash
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
about
taxes
usually
At other
on too long, trying
tax shelter.
lost
a good
weak judgment.
Commission costs of buying
discount
aspects such as making
the
stocks, especially through
or selling
minor factor, compared
are a relatively
broker,
a
capital gain. Some investors, even
sell becauseof taxes\342\200\224strong ego,
can't
they
themselves
decisions
nght
in
the
to
more
a
first place and taking
action
of owning
because
in options too much
they think it
14. The multitude
speculates
concentrate
is a way to get rich quick. When they buy options, they incorrectly
involve
that
volatility
greater
options
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
reward
small
and, therefore, a relatively
unsound
who has spent a lifetime
stocks
and the
researching
American economy, do you have any opinions about the quality
of
research
provided
by Wall Street firms?
As someone
important
stock over real estateis
when
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
One of the great advantages
needed.
235
profit by holding
to get a long-term
convince
erroneously,
in the hope of achieving
investments
leads to unsound
in the past, investors
times
O'Neil
William
investment
An
the S&P
brokerage
insufficient
generally unEach
companies.
wrong
assume,
over
for
the consistency
twenty-five
years, that
walk
random
though
in each cycle. There is
which reports should actually
Wall
Street
research is that
given
of
80 percent
be
written.
it
seldom
major problem
sell recommendations.
I would
the
on the
are leaders
groups
with
provides
investor
is written
to determine
screening
analysts
top-rated
to turn out his or her quota of reports, even
has
a few industry
Another
that
average. One major problemis that
research
firm
analyst
industry
only
World found
in Financial
article
derperformed
of your successas a stock
don't
think very much of
you
theory.
procedure.
15. Noviceinvestors
They
place
rarely
is quibbling for
more important
like
to put price limits
on their
buy-and-sell
orders.
the investor
market orders. This procedureis poorbecause
than
rather
a
emphasizing the
and quarters of point,
eighths
result
orders
Limit
movement.
eventually
overall
and larger
and not getting out of stocks that should
the market
in your completely missing
be soldto avoid substantial losses.
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
have
trouble
principles,
should be doing.
17.Most
opinions
is more
rather
look at stocks objectively.They are always
and personal
and
hopes
favorites,
they rely on their
of the marketplace, which
attention to the opinion
than
frequently
18. Investors
such as stock splits,
cannot
paying
right.
are usually
influenced
increased
dividends,
firm or advisory recommendations.
crucial,
that are not really
by things
news announcements, and brokerage
is neither
efficient nor random. It is not efficient
are too many poorly conceived
opinions;it is not random
there
because
strong
investor
emotions
In the
most
general
sense, trading success requires three
basic
trade selection process, risk control,
and discipline
two items.
William O'Neil providesa perfect
components:
an effective
to adhere to the
first
can create trends.
trader. He has deviseda specific
stocks
selecting
risk
(CANSLIM),he hasa rigorous
control
has the discipline
not to deviate from his selection and
of the
illustration
strategies.
investors
and having
hoping
The stock market
because
detailed in
regarding
particularly
successful
In addition
to the
this
traders
stock
selection
strategy
for
rule, and he
risk
control
methodology
and investors should find the advice
common mistakes, listed near the end of the interview,
useful.
chapter,
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
the paper
in hand to his father
and
asked,
\"If I go up to my room and get
a dollar,
told
him that it didn't quite
can I buy this stock?\" His father
work that way. \"You have to do someresearchabout a company
before
in
the
he
invest
stock,\"
explained.
you
A few
the Wall Street Journal again,
days later, leafing through
on
found
an
article
Ward
which
made
and
Foods,
Ryan
Bit-O-Honey
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.
William
O'Neil
he decided to try
receptionist
of his
was Ryan's
to get
interest
a job at
in O'Neil's
idol. After
graduating
college
in 1982,
He told the
company.
work and his willingness to accept any
O'Neil's
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
Stanford
University Professor Norm
that year was a phenomenal 161 percent.As
if to
His
Zadeh.
demonstrate
return
fluke, Ryan reentered the contest
performance was no one-year
with
a 160 percent
virtually 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,
return
was
a
remarkable
1,379
percent.
compounded
for trading,
most
of the traders I interviewed have a love
Although
demonstrated
none have the unbridled
enthusiasm
by Ryan. To Ryan,
is
like
a
terrific
the whole
of
selection
stock
game\342\200\224atreasure
process
he
is getting paid to do
hunt as he describes it\342\200\224and
he still can't believe
The officesof the traders
Ryan
I interviewed
clearly
were
I would go over our
charts.
Ryan's
didn't
seem
to care about the
lack
ranged from
a noisy,
of amenities.
he was suppliedwith his charts and computer
be content to work in a hall closet.
Did your original job at
William
O'Neil
floor-sized
room. Ryan
I suspect that
as long
runs,
he
would
historical
did. He was my
role
once
On your own time, I take
I would
and
studying.
it
take stuff home every night
and
on weekends.
model.
Yes,I opened
a $20,000
How did you
back,
account
was
shortly after I started working
for
the
do?
I ran the
all
account
[1982].
company
account
up to about $52,000 by June
including some of my
down to $16,000.
Do you know what
you
did
starting
capital.
1983.
Then I gave
By mid-1984, my
wrong?
as
probably
& Co. involve any market
I was in, I just started studying
studying?
you trading at this time?
Were
Yes. I sat down
1983 through
analysis?
but
unadorned
the
you
I studied the company's past
models of great winning
stocks
to ingrain in
a stock looked like before it made
a major move. I tried
my mind what
to get to the point where I was looking at the exact same things O'Neil
I studied
recommendations.
it
staked
had the low end of the spectrum
I was surprised to find
or otherwise,
of an office, plain
to be a cubicle within
workplace
out. Instead
Yes.
kind of things
What
Initially,
it.
to the elaborate, but
239
that his
in 1986,
No,
David Ryan
and
the
every mistake that I had made from June
of 1984. Probably my biggest mistake
was that
studied
middle
even though we were in a moderate
bear market\342\200\224the Dow came down
from 1,296 to 1,078\342\200\224Icontinued
to play as aggressively as I had during
the bull market from August
1982
June 1983.1 also made the
through
mistake
of buying stocks that 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.
David
240
you confident,
Were
despite your
1983 to mid-1984, becauseyou
were
you
poor
felt
that
Ryan
during midout what
had
figured
you
performance
Any
studied
hard
very
and was determinedto
be
the
entered
I was going to do very well. So in 19851
disciplined,
a
with
that
stock
division
the
I
won
year
U.S. Investing Championship.
and
in
the
I
contest
reentered
subsequent years
161 percent return.
100 percent returns in 1986 and 1987 as well. I was
exceeded
I thought
substantially
doing
the
when
they
How
are
same thing over and over again.
had all the characteristics I liked.
exact
you
doing
I was
buying
stocks
for in individual stocks is Super
Love (Prentice Hall, Englewood
Cliffs,
NJ,
on some of the
1977). The book has a great
study
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)
type of market: Stocks
three years. I am
in
last
the
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
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
trader?
stock
Essential
Money
in
on top of the
list
Stocks
(McGraw-Hill,
New York, NY
that is must reading is How I Made
Market by NicholasDarvas
lot
of people
Another
by Edwin
himself wrote
laugh
at
that
(Lyle
is O'Neil's
Two
Stuart,
title, but it is fun
book, How to Make
1988).
Another
book
Dollars
in the Stock
Inc., Secaucus,
NJ, 1986).A
learn a ton.
Million
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
by
Timing
Inc., Gainesville, GA, 1978)and a book
Library,
an English fellow named Beckman(Milestone
Publishers,London).
books are good, but you leam the most from the market
I buy a stock, I write down the reasons why I bought
time
Every
it [he
a
out
binder
annotated
pulls
charts].
containing
Doing this helps
cement in my mind the characteristics of a winning
stock.
even
Maybe
more important,
it helps
me learn from my mistakes.
All
those
itself.
kind of things
What
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, and
reading
look
New
has
some
York,
NY, 1988), which
sections
on
short
on Elliott
Wave analysis, which
good
selling. Finally,
I think
has some validity,
there
is Elliott Wave Principle by Frost and
called Super
in a different
are
to
by Richard
Markets (Dow, Jones-Irwin,
Prechter(New
this year [May 1988]?
Sofar this year, I am down. We
one on what
Stocks
Performance
Yes, because I had
241
others?
A good
wrong?
doing
David Ryan
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
I want
to take a closer lookat.
Your company
charts
follows
stocks;
you can't possibly lookat
but in a week I probably
go through
of the data base. Keep in mind
a majority
7,000,
through
4,000 charts. So, I see
are probably about 1,500 to 2,000stocksthat
like to look
at those
Yes, because they
Doesn't that
trade
under
about
As high
there
a lot
Actually,
$ 10, and I don't
are
usually
$10?
a lot
But
aren't
sometimes
down there for a reason.
the best buys\342\200\224the stocks
of those
many
rather
years. I would
the $15 to $20 range.
wait
After
you
have
stay
down
do
at the
figure?
80, and preferably above 90.
above
have
an EPS
a lot of peoplethink.
is what
there
until they prove themselvesby
They
are alreadyon the table.\"
of the biggest
winners, we found
that,
that
no one is
for years and
up to
moving
rank of 99.
broad
once
the
through
However,
in analyzing
in many
cases, the
down
the stocks that
the charts and written
you look at next to screen your selection?
market
stock
weight of the
the roof.
from taking off in that
just
sit despite
may be weak and
market
type
Perceptions\342\200\224people
might
continue as strongly
as they
of earnings
What
else
breakdown
to
The relative
are
screen
stock;
hundreds
had
earnings
comes
very good earnings?
holding
off,
these
back the stock, but
stocks just go right
would
keep
the stock
of situation?
not believe that the earnings
had in the past.
are going to
you using besides the EPS and the earnings
your stock selections?
is very important. [The relative strength
strength
See
price change relative to all other stockssurveyed.
chapter for a detailed definition.]
stock's
the
for a while.
table
What would cause a stockto
The
say, \"It's too late to buy
How about if the stock market is OK? What
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
chapter for
markets
One thing
that
usually
anticipate.
me about the EPS is that
I would
think that the price of
would run up well before the earnings
starts to be
growth
stock
That
reviewed
interest you, what
I
stocks
an EPS
the earnings
paying any attention to?
Sometimes.But
the O'Neil
[See
experience,
of the smaller OTC stocks.
those
in
least
of stocks I buy
been on the
Yes,
(EPS) rank.
EPS.]
extremely positive.
a lot of the OTC stocks?
out
knock
as possible\342\200\224at
In my
the
under
of the
What are you looking for
surprises
stocks
per share
7,000
anyway.
Is that a goodrule:Avoid
243
Ryan
bined in our earnings
a detailedexplanation
basis.
on a regular
I don't look
7,000
David
ranks
the O'Neil
a
David
244
are you looking for in
What
relative
Ryan
David Ryan
Yes. Investor's
Intuitively,
\"It has
I would almost think
already
gone too far. It can't get
any
stronger.\"
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
I am usually
relative
high
strength
stocks?
mat because in my first step of screening the
I generally rule out stocks
mat are overextended from their
base.
charts,
the
the
with
relative
continue
to
often
stocks
strength
highest
Very
the market
for months and months. For example,Microsoft
had
outperform
it was at $50 a share.It eventually
moved
a relative strength of 97 when
to $161.
to avoid
able
the
higher
go
with
a relative
I would rather
Yes,
once the
relative
So you
are
strength
not
the relative strength the
that
also the trend
itself,
but
Right.
If the relative
of 99
strength
starts falling off, I usually
only paying
better?
than 95. However,
get
out of the stock.
I checkthe
starts
I going
in the right
how you filter
I would probably
relative
strength
order,
down your initial
an uptrend,
to relative
EPS
stock
place relative strength
takes off before that
between
0 and 200.1
then
I would
be
big
earnings
the
relative
strength,
what
is
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
number
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
stocks.
else do you look at?
What
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
You
but
higher,
say
1 percent
Are
there
other
any
don't
you
important
elements that go into
the
stock
selection process?
There
Doesn'tthat
strength, in terms
of
Yes. You
usually
then
stock's
checking
rule
out
most companies
that have been around for
a
while?
list?
first,
top 50.
should be something
new that attracts people to that
stock.
Reebok
had
shoes
had
that
were
hot. Compaq
a fantastic
example,
was a leader in the software field.
Microsoft
portablecomputer.
very cautious, even if it is still well above 80.
Am
groups
For
strength.
breaking
industry
group to be in the
than
less
Yes.
attention to the relative strength value
of the relative
strength
as a filter in your
To continue the screening process,after
relative strength,
the EPS, and the industry
your next step?
stock
Are you implying
Daily ranks
the industry
usually want
that\342\200\224
if you are restricting yourself to
industry
90.
above
preferably
of the
selection?
stock
At least above 80, and
also use the relative strength
Do you
strength?
245
EPS. Many times the
report comes out.
don't want
nothing
to
be playing
really hot or brand
General Electric because there
new
going
are exceptions.For example,General
sideways for the
last
their situation around.
five
years, and it looks
Motors
like
on. Occasionally,
is
there
has gone virtually
to turn
they are trying
246
General
With
might the \"new\"
Motors,
be
the
247
DavidRyan
David Ryan
recent
shift to high
How long do you
new
in emerging
a stock?
hold
typically
styling?
but in most
Yes,
entrepreneurial
cases, you
are
going
to find
the
I usually
hold
aren't
that strong
imagine if you go through 7,000stocks,there must
a large
number that meet your
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.
How do you
I pickthose
base
down
cut
from
seventy to seven?
that have all the characteristics plus a
great-looking
I also look at how the stock has done in the past. For
pattern.
doubled before? A lot of the stocks I buy
before I buy them.
the stock
has
already
doubled
have
and tripled
technical
picture.
process,do
Since
you use an extremely rigorousselection
a high
percentage
maximum loss
lot
quicker.
of winners in your
you
trades easily make up for all the
that
builds
another
only use market
orders?
up,
base, and then
I liquidate.
should
is just trading
and
back
forth, you could put
in
a
is going to drop, just sell it.
I learned
to
lesson about market orders in 1982 when I was trying
at $15, for $14%. The next day it
which was trading
to buy the stock at $16k
Vh points, and I couldn't bring
myself
the
Textone,
buy
when
I could
went
to $45.
have bought
it
at $15
a day earlier. That stock eventually
One element of your trading
style is buying a stock when
conditions
fundamental
the
new high. Wouldn't
screening
that
have been in place well before
point?
In somecases,they
50/50,
in those
buy?
it makes
a
you use
have
picks?
I allow
triple in price. The profits
losers.
stock
because I cut the losers very quickly. The
is 7 percent,and usually
I am out of a losing stocka
I make my money on the few stocks a year that double
and
about
you
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
jumped
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
people
market
the stock
actually prefer to buy a stock that has already doubled as
to a stock that is in a long base?
opposed
That is when
Do you think
You
No, only
stocks
the stock runs
until
wait
down.
breaks
In a dull
stocks
example,
that
weeks.
criteria.
On average,
seventy
stocks
two
companies.
growth
I would
criteria,
winners for about six to twelve months,
three months, and my losers less than
about
my big
small
you
have
the
low
who
might
have
been. But I am trying
the most chance of making
end
bought
of a base back to
it near the highs
the
and
those people are going to be happy
lot of overhead resistance.
money.
high
When
to buy
a stock when
a stock is coming off
end, there will
be
a lot
a loss for months.
to get out at even, and that
sat with
of people
Some
of
creates
a
248
David
So, a stock which is at new highs has much
more
of an
Ryan
top
no one ahead of
because
Right,
first
is at a loss and wants
has a profit;
Everybody
opportunity.
you
to
get out
at
is happy.
everybody
But the downside of that is if you wait for a breakoutto new highs,
a lot of times the market will pull back into the trading range. How
do you avoid getting whipsawed in those situations?
You can tell
doubles
one day and the
by the volume. If the volume
to a new high,
it is telling you a lot of peopleare interested
moves
in the
stock and buying
it.
becomes very important as a filtering
So volume
to avoid
process
getting whipsawed.
Yes. If the
stock
moves
10 percent,
I would
be
Do you buy
it the
you wait for it to
to buy
If you buy
at what
and
it as soon as it
to
buy
ground,
but the
volume is only
up
decide
to new
to
new
at all? Do you
of the base, or do you
end
even
mean
some
require
if it is just below the
minimum
penetration?
the base. In some cases, it will break out and come
That's fine, and I will stay
not reenter.
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
No, if it just
reenters
back to the top of the base, but
it
its base,
when a stock drops back into
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
to $16. Therefore,you want to cut your losses quickly.
highs,
has
it
back into the base a
price
going
first
day you buy
bearishindicator?
be at a profit
should
Stocks
Yes.
the
on the first day is one of the
having a profit
to
make
money on the trade.
going
greatest
use the table in Investor's
increase in
percentage
average
volume
Do you
you
Yes.
After
interested
in buying,
timing
signal.
using
the
relative
levels?
Yes, I use it to help spot stocks that
Are
In fact,
that you are
them.
indicators
that lists the stocks with
to the past fifty-day
Daily
volume
best
it to verify
are
just
about ready to take off.
stocks you have alreadypickedout?
highs.
and it then
was
From a technical perspective,is the
or do
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
goes
at new highs
a stock
you
to new high
wary.
first day the stock breaks out
consolidate
for a few days?
assumea stockthat
$21
its base
a lot
stock
I want
249
Ryan
If it reenters
open running
field?
the
David
a false
I have
done my weekly screento
I sometimes
been
Can
you elaborate
wait
for
select
the stock
the stocks
to hit
that
I am
column
as a
on using volume as a trading tool?
$19?
When
If it reenters
position.
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
starts
consolidating,
dry up. You should see a downtrend
in volume.
picking
up again,
up
it usually
means the
stock
you want to
Then when
is ready to
250
David
volume
So, in the consolidation phase, decreasing
continue
to
see very
high volume, do you
start
is good.
thinking
Ryan
David Ryan
top?
potential
Yes, in many
Yes, becausethat
You
in volume
an increase
want
a decrease
as the
volume
in
a lot of peopleare
that
shows
getting
out of the stock.
breaks out, but
stock
the
when
want
you
you look for?
other
volume
signals
When
the
market,
or a stock, is bottoming,
down
it
to 2,085
Dow
declines
the next day, and then
support.
want
you
of further
absence
an
For example, if the
demonstrates
ratio
P/E
stocks?
I do. The most profitablesituation
is when
you find
trend that
at a P/E ratio
in line
earnings
is trading
ratio.
stock consolidates.
Any
downside.
cases
a stock with a strong
with the broad market
If you
volume combined with
avoid high
therefore
Do you
If you
251
closes
to see increased
price progress on
the
from 2,200 to 2,100, trades
higher on increased volume,
are a lot of buyers coming
It suggests
that
described
in selecting
there
avoid high
from
catching
That
was
a little different
that have prevented you
wouldn't
stocks,
biomedical group move?
of the
because
fact that
the
whole
group was
P/E ratios.
at high
trading
ratio
P/E
the whole
Does that imply
that
there
should
be an exception made for
a new
industry?
in.
The screensyou
have
[See
O'Neil'sCANSLIMmethodology.
definition.] Did
you
stocks are essentially
the O'Neil chapter for
add any of your own elements to
Yes, I learned that most of our greatest winning
off with prices under thirty
times
earnings.
[price/earnings]ratio
ratio
is a lot higher
is not
on
lower
important. I think
P/E ratio stocks.
his
started
O'Neil
says the P/E
it is, in that your
success
Has the basic market behavior
I guess
I'm
When
not too low P/E ratios?
talking
a P/E ratio
that
So
if the
ratio.
buy stocks with
beyonddouble
exact.You are
stocks.
about lower P/E ratio stocks,I mean
is between
even and up
to
two
stocks
that
have
times the 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
stayed
it
up
one of the
with
the
best
stocks
Do you have any
thoughts
I
to study it
need
more
I think
about.
Instead
year
growth
stock should
these
rules.
the
same in the 1980s versus
time
after
time. It hasn't changedat
stocks from 1960 and line
winning
in 1980 and they are going to have
characteristics.
same
short,
with
1960s?
the
Yes, the same types of stockswork
all. We can take one of the
greatest
exactly
But
to be absolutely rigid
want
don't
the 1970sand
approach?
recommendations
Yes, you
on the
subject of short selling?
and more
However, to pick a
experience.
we were talking
characteristics
all
these
need
to
flip
you
for a poor fivelook
should
of a good growth
record,
you
that
are
record and quarterly
decelerating. The
earnings
time
be
to hit new lows.
losing
relative
strength, breaking uptrends,
and
starting
252
David
David Ryan
Ryan
think that short selling may be a critical element for
superior performance
if we go into a long bear market?
Do you
help. But,
about three times as hard
will tell you
O'Neil
Bill
that
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
and the fact that
rally; the
previous
the
By how well my
it's
before
too late?
it indicates
losing,
have five or sixstocks
up.
else
What
do you
in a row
that a bear market
that get stoppedout,
bull
the
is developing.
a caution
phase,
If I
flag goes
the Dow
difference
and the
advance/decline
daily
line [a graph
Stock
each day versusthe number
The
declining].
advance/decline tends to top out a few months before the Dow does.
Exchange
that
the
stabbed
really
that
business
the market.
long. Do you have the
will be able to trade successfullyalmost every
you
year
Yes,becauseI have
a very defined set of principlesthat will
established
for years to come. Also, I
the foundation for successful trading
provide
stop learning.
to never
Do you feel you
the number of New York
between
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
a long time?
plan
net
that
confidence
look for to signal a bear market?
between
Divergence
of the cumulative
are doing. If, during
stocks
individual
in late August,
Also,
in three years. I think
time
for
the leaders start
line
advance/decline
rally.
were
there
You haven't been in
do you recognize a bear market
How
is
was on low volume?
the rally
Because
Yes,
it would
I think
Yes,
253
Yes.If you
only
going
are
better
getting
as a trader?
try to learn from everysingletrade
to get better
and better as time
goes
that
you
make,
you are
on.
stocks advancing
than
Why are you so much more successful
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 the
or
eight
I have the charts delivered to me on Saturdays, and I go through
markets.
are
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
topped
market
stock
Were you looking for
out during
the
first
quarter
of 1987, well
peak in August.
a top
because
of that?
Not at that point, because a lot of the individual
stocks were still doing
was after the
very well. The big clue that the market was really topping
Dow came off its high at 2,746, there was a very feeble,
low-volume
rally, and then
juncture, I
decided
the
market
got hit for another
it was time to move out
of the
90-point loss. At
market.
that
After
A lot of people who
and still
That
have
is probably
only
use
invest
mediocre,
because
their
spare time to study the market
or even losing, results.
they have not
found
a disciplined
picking stocks.They read an article and say, \"That
stock, I'll buy it.\" Or they buy a stockbecausetheir
it.
sounds
broker
system for
a good
like
recommends
254
David Ryan
advice
What
The single
you give the novice
would
most important
mistakes. That is the
I can give anybody
is: Learn
to
become a successfultrader.
way
advice
only
from your
for that
next
big
about
the market
are going to make it have
now
than when I was only
same
of knowing
satisfaction
you
move.
You make it sound
It
chart
weekly
to find
The
it is
always fun to be looking
the stock with
all
move. The feelingisn't any
500 shares. There is still the
trading
found
a stock before it made
its big
a big
treasure
hunt.
Somewhere
book] there is going to be a big winner,
in here
and
[he pats
I am trying
it.
conventional
summarized
wisdom about how to make money in stocks is
advice: Buy low and sellhigh. David Ryan
by the semi-facetious
would disagree. His philosophycan be summarized
as: Buy high
will not consider buying
higher. In fact, Ryan
usually
any stock
for less than
and
sell
selling
$10.
is basically due to using aprecise methodology and
to follow it. As Ryan
has clearly
demonstrated,
a trading
doesn't
have
to
be
to be extremely
methodology
original
successful.
that most of his approachhas been
Ryan
readily
acknowledges
learned
from
the
and teachings of William O'Neil. With
directly
writings
the help
of hard work and in-depth study,
he has been able to
apply
Ryan's
applying
great
approach
winning
the
a game.
To me it is like a giant
is.
the
like
is that
to find
winner\342\200\224trying
characteristics
that
different
time
Every
reasons for buying
existing
The greatest thing
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?
David
success
discipline
O'Neil's trading
with great effectiveness.
philosophy
When traders deviatefrom their own rules, they
invariably tend to
lose. Ryan is no exception. 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
helped
he buys a stock, Ryan
the
stock.
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
entries
has
his
more important, reviewing
stocks.
past
Perhaps,
a new
position,
him
avoid repeating
similar trading
mistakes.
is to buy
O'Neil's
approach,
approach, like William
on the very best stocks
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
basic
Ryan's
and strength.
essential
ingredient
to the trading
approach of many
successful
traders.
Schwartz
Marty
Champion Trader
I
interviewed
Marty
him to be very
Schwartz
opinionated
spills
occasionally
intensity
subject
over into anger when
a raw
trait
philosophy
I found
hours.
about the
admits
trading). In fact, Schwartzreadily
in trading.
with
None of this \"going
In his view, the marketplace
for Schwartz.
as program
a useful
at his office after trading
and intense
of trading. This
nerve is hit (such
that he 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
his analysis
no doubt
followed
was still
that
his
daily
he appeared very tired, I had
finish his work that evening.
Schwartz
has
unfinished.
he would
Although
work routine religiously
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
trader
more than 3 percent of
in 1979, but
his
equity
he
has
done so without
on a month-end to month-end
ever
losing
basis.
258
Marty Schwartz
Schwartz tradesindependently
from
an office at home. Heis proud
fact that he has no employees. Solitary traders of this type, no
of the
matter
how
are usually
successful,
to
unknown
the
public.
of astounding.
In nine of the
entered (typically
with
four-month
trading
single
entry
he
a one-year
entry into these contestsis his way
Schwartz's
(In
of telling
around. In terms of risk/reward
is the best trader
he
the one
a near breakeven
result.)
he
scored a 781 percent
contest,
he witnessed
contest
in
short
stake of $400,000),he made
more
contestants combined.His average
return
in
these nine contests was 210percent\342\200\224nonannualized!
four-month
remaining
half.\" Most of those who
championships
ratios,
In his
return.
the world that
he may
well
the
top 5 percent
School.
military
Vietnam
about
early days.
your
back
do you
From whenever
you
think
is appropriate.
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
Well it is very
not
uncomfortable
the work; that's why
doing
here. I calculate a lot
my
than
own
charts.
My attitude is that
I'm
someone
of mathematical
competing
doing it now as you are sitting
ratios and oscillators, and I post
want to be better prepared
against. The way
I prepare
myself
is by
doing my work each night.
As
because
I grew
it was
was my ticket, probably
up, I realizedthat education
emphasized in my family. I studied hard and was
strongly
an honor student
in high
school.
school
class. Perceiving
that
I wasn't
going
in 1967,1
officers.
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
I am
I always
graduating
that was recruiting
want me to go?
high
myself, were in
including
Business
was accepted to the Columbia
had
ended
At the time, the government
just
graduate school
and combat in
at Columbia
deferments.
Since I was unhappy
unit
reserve
didn't
Corps
appeal to me, I joined a U.S.Marine
You
How far
of their
there,
matriculated
me.
After
me
great
realization.
first
to be at the top of 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
be.
Please start by telling
which was one of the
College,
orientation
to freshman
they said,
my life. When I went
experiences
\"Lookto your left and right and realize that half of you are going to be
in the
top half of the class and half of you are going to be in the bottom
of
a starting
than all the other
money
ten
I was acceptedto Amherst
Schwartz,
in the
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
home;
Jewish
time.
that
the only reservist in
was the deal I made when
person
there, and they
weren't
School
Candidate
Officers
in Quantico
but I came
I was also the only
too favorably
disposed toward
drew the Star of David on my
There were 199 regularswho
I was
went
to Vietnam,
recruited.
Jews. One time, the platoon sergeant
to knock
the crap out of him,
forehead with a magic marker. I wanted
of what it
the historic
but I figured he didn't really know
significance
that
I knew he was just trying
to find any kind of pressurepoint
meant.
I had to do wasscrubthe magic
would make me break. The hardest
thing
off my forehead. That's a bitch [helaughs].Anyway,
marker
Ipersevered
Marty Schwartz
260
and
made
achievement.The
of the
it through
feeling
successfully. I consider that a really fine
as time passes, and you forget the real pain
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
jobs
while
time job was as a securitiesanalyst
health and retail field, and I stayed
I completed my M.B.A. My first fullat Kuhn
Loeb. I specialized in the
there
for two
years. I found
that,
on
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
trying
to recruit
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 into three subgroups
often. Because the research
want to work, he had one of the senior analysts of each group
reviewthe work of the analysts. The policywas that our research reports
would be circulatedand critiqued
the
by the other analysts within
to
sent
out.
being
subgroups
prior
I had written
a bearish
report on hospital management stocks,
that
the
rate
of return.
saying
industry would eventually
go to a utility
As part of the normal routine, the draft was circulated among the other
one of whom got drunk
one night on a flight
home
from
analysts,
him a copy of the
California
and
told a client about my report. He even
sent
in progress.
What right did he have to send out my work? The
report
to the report's release, becausethe client
stocks began plummeting
prior
a
started
rumors
that
negative
report was about to be issued.
spreading
a bitter experience. I had to testify
for six hours before the
It was
analysts,
directordidn't
Stock Exchange. My company's counseltold me, \"We will
we will
our interests diverge at any point,
represent you, but should
New
York
inform
you.\"
the
did you know what had happened?
time,
improves
experience.
The
At
261
Schwartz
Marty
but I assumed that
I did. I was totally
I didn't,
would
everything
be all right if I told the
realized I had
an exchange
confessed
because
drug
analyst
eventually
it all together. It was a
official
found
out what happened by piecing
I shut the door of my
for me, and I was very
sour.
rotten, bitter
experience
the drive, the desire to
office
and stopped working. I lost the spark,
truth,
which
the exchange
exonerated;
beenset up.The
succeed.
What
were
I was
still
whole
negative
you doing
doing
at that time?
but I didn't have my heart in it. Besides that
it was early 1973, and I felt the market was
experience,
reports,
in technical
analysis. At the
topping out. I had become very interested
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
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 covering growth stocks, which in those days sold at forty or
It was all so ridiculous!
times
fifty
earnings.
Were
ever
you
discouraged
happened
from
to the bearish
writing
bearish reports? Also, what
report that
was
leaked?
wrote bearish reportson Wall Street at that time. I was allowed
the bearish report on the hospital
management
industry, but
I don't believe
ever intended to publish
it. Of course,
after it was
they
leaked,
they were forced to rush it to the printer to save their scalps.
Nobody
to complete
What
eventually
happened?
I lost my job in the bear market and was out of work for four months.
That was a very interesting
because I believe you learn the most
period,
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
machine to run
time
on a monster
any
PC. He was using
different
some of my money in
dreams of glory.
with
dissipated
Having
was in for a shock.
was tainted. \"Oh,
involved
get
averages,
today you could do on
I put
that sort of thing.
and I lost most of it\342\200\224along with
my
I decided I had to go back to work. I
I
had
been totally honest and forthright, I
Although
my capital,
aren't
you
the guy who wrote that
It didn't
report?\"
I had been totally ethical and exonerated.Peopledon't want
matter that
to
him,
that
programs
moving
with any controversy,
even if it wasn't
of your
own
making.
& 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
a retail-oriented
extraordinary success.
I always had a good noseas a securities
analyst, and it has
I noticed
that the head of research,who
me in good stead. When
I started
out to lunch
went out to lunch,
regularly,
going
began
for
another
job. So, when
I had another job lined up
at Loeb
the
firm
went bankrupt
in
fall
stood
never
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.
263
what I calledthe \"tap dances,\" which made you feel like
of meat. You meet with portfolio managers to give them your
views on the stocks you follow,
so that they will give commission
business to your
firm. On a typical trip, you might have five
appointments
I resented
a piece
for dinner,
Houston,
fly to San Antonio
that night to be ready for breakfastthe next
in
I wanted
a family,
to have
but
I felt
and then fly
morning.
to Dallas
later
I got sick of it.
that I wasn't able to handle
it
I was afraid of being
because
I had resisted getting
married
at that point,
I wondered
whether it had been a
seem
to
know
to handle failure
self-fulfilling prophecy.
how
People
because
It almost becomes a negativecause and
they can produce it themselves.
effect
cycle, whereby they produce it, they know how to handle it, and
financially.
tapped
out.
they
wallow
had
become
But,
in it.
By mid-1978,1 had been a security
analyst
intolerable. I knew I had to do something
of mine
friend
it was
interviewing
Schwartz
Marty
for eight
different.
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
it gets
when
different
myself a synthesizer;I didn't
methodology, but I took a number of different
and molded them into my own
approach.
a guy, Terry
and had an
Laundry, who lived in Nantucket
a new
methodologies
I found
unorthodox
engineering
approach
as going
the Magic T Forecast.He was an MIT
a math background, and that appealed
to me.
that the market spent the same amount
of time going
called
with
graduate
His basic theory
up
I consider
newsletters.
necessarily create
was
down. Only the amplitude was different.
Marty
Schwartz
than they
go
264
In my experience, markets comedown
Doesn't that contradict the theory?
The market
the
price
in
fact,
quicker
use to measure
you
For the record, what is the name of
process.
element
Did you make a complete
to me.
book?
Laundry's
I always
laugh at people who say, \"I'venever
technician.\" I love that! It is such an arrogant,
nonsensical
used fundamentals for nine years and got rich as a technician.
were still doing fundamental
But
you
Yes,
to earn
You're
There is no book. He just extolledhis theory
through
his various
He
also had
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.
Anyway, I subscribedto all these letters, developed a
like crazy. By mid-1979,1hadrun
and traded
$5,000
up to $140,000
methodology,
in
two
just
years.
from
a loser
able to separate my
When
I was
I was
able to accept being wrong.
more
upsetting
happen.
I figured
winner,
I said,
Before,
it out, but
it
can't
if I'm
from making money. When
I was wrong
was
admitting
to try to will things to
When I becamea
the hell out,
wrong, I'm getting
I used
and
can happen
wife
my
I
response.
analysis as an analyst?
said to me, \"Go out
on
own.
your
wanted to work for yourself. The
'11 go back to doing what
you were doing
you've
is that
a rich
always
you
I always picturedmyself
but
it came
when
time to take
I had $140,000, of which
as being
brave, courageous, and strong,
the chance, I was scaredout of my mind.
about
$30,000
was tied up in
and
deals
tax
$92,500 was used to pay for a seat on the American
Stock
Exchange.
That left me with about $20,000
on the floor as a market
when I went
I borrowed $50,000 from
maker.
which gave me $70,000 of
in-laws,
my
capital.
working
off losing in
I started
involved
in Mesa
Petroleum
first
my
two days in
the
I got
business.
options because Zoellner,whom
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
started going up and I never looked back.
The next year
months, I was ahead
by $100,000.
I earned $600,000.After 1981,1 never earned less than seven figures. I
remember talking
to a good friend of mine
in 1979 and saying, \"I don't
think anybody can make $40,000a month
Now I can
trading
options.\"
do that in a day without a problem.
day,
Mesa
options
After
the
first four
were
doing
be wrong.
my money and go on to the
next
that my winners are always in front
so what!
a mistake,
to take a loss. If I make
philosophy
painful
to save
needs
money.
it out, therefore
\"I figured
because I want
the
than losing the
to a winner?
ego
met
before.\"
third
When did you turn
a salary. But
thirty-four
that
worst
After
it was kind of funny.
some pamphlets. Actually,
for his
I mentioned
him in a Barron's
article, he got a lot of inquiries
have any
His response was, \"I don't
He is a little eccentric.
pamphlets.
made
have
them
and
some
He
should
printed
money.
copies available.\"
of indicators
that I used to
I developed
and synthesized a number
determinewhen the market was at a lower-riskentry point. I focused on
newsletters.
to technical
fundamental
from
transition
Absolutely.
is not
the price high. That,
had different
theory
and it has been extremelyhelpful
I learned,
that
time
the
which
precedes
high, but an oscillator high,
his
work. The
is a major cornerstone of
properties
up.
265
analysis?
it goes down may be a distributive
before
movement
them M-tops. The point
I call
a lot
Schwartz
Marty
trade.\"
You
very well on the floor. Why
did
you
leave?
By living
of me, it is not
so
It was very slow during
upstairs office to eat my
lunchtime
lunch.
While
in those
years. I used to
go
to an
I was at my 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
you continue
trading stocks during this period?
a little longer
but with a different mentality. I traded stocksfrom
time horizon. I don'tfeelthe same pressure when I own 100,000 shares
of stock
as when I own 100 S&Ps.
Yes,
Will
you
No, I find
trade
stocks
it harder
as readily from the
to trade stocks from
short
side
as the long side?
it is just easier to short
for the buck. Also, I hate
the
you to death. I'll give
have I met a lesstalented
the
con
amount
disproportionately
large
S&P,
group
of money
normal
the
short
because
you get so much more bang
to
they are always trying
my view on specialists: Never in my
of people who make a
relative to their
skills.
Having
most
extraordinary
the specialists
markets,
get out'/\302\253lower.
their daughters
%, they
So,
they
marry
the
Ican't standmost
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 tell my
friends
to have
son of a specialist.
established
institutions.
Ihaveame-against-them
I believe
mentality, which
more
helps me be a better,
trader.
aggressive
It helps as long as I maintain
an intellectual
bias in my work and
in money
discipline
management.
What was your experience during the
of the
week
crash?
I
again. Why?
at the
I have thought
in long.
came
time, was the
it, and
about
on October
Because
16, the
do the same
thing
108 points, which,
fell
point decline
one-day
biggest
I would
market
October 19 stock
in
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.
So, you knew that you were in
Yes. Also, Marty
side.
system;
267
bid for 20,000down
Zweig,
who
over
trouble
is a friend
on Friday evening, talking
about
of
the weekend?
mine,
was on \"Wall
a possible
Street
depression. I called
there
day, and he saidhe thought
was another 500 points
Of course, he didn't know
it was going to
happen in
Marty
the
next
risk in
the
market.
one
specialist
you
book is the
Week\"
Because of the uptick rule?
No,
Schwartz
Marty
day.
What
made him so bearishat the time?
I
his
life
the specialist
think
monetary
bonds were sinking
indicators
rapidly
were terribly
time.
at the
negative.
Remember,
the
268
Marty
What
that Monday? When
happened
did
you
Schwartz
get out?
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 painful,
day.
bit
I was
and
bleeding,
I honored
but
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
That's
retreating is offensive,becauseyou
same thing
the
in
market.
powder to make your
still
The most important
comeback.
doing something. It is the
is to keep enough
thing
I did real well after October
19.In fact,
my most profitable year.
1987
was
You
liquidated
think
about
I thought
are
your
long position
very wellon October19.Did
you
actually going short?
is not the time to worry
I said to myself, \"Now
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
about
making
like
what
it, but
money;
was going
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.
to my father
my fear of a depressionis related
graduating
college in 1929. If you talk to people who got out of college at that time,
it is as though
a ten-year
their
lives. There was
period is missing from
I think
substantial
That
stuck with
just nothing
going on in this country.
always
it so much. I think
that is one of the reasons why
I
me, because I feared
don't try to increase my earnings
On
the
of
the
crash,
geometrically.
day
when I looked at my son in his crib, I thought,
I don't
want him ever to
ask me, \"Dad, why didn't you do everything
have done?\"
you could
When did you
start
need
to make any more
at that point.
family's security. I didn't
money
On Wednesday,the market got up to an area where I thought
it should
be shorted. I ended Wednesday
short
twelve
S&P contracts, which
for
me was a miniscule position.
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,
of
because
fund
that
managers
position. It
but mainly
because
recommendation,
in the country was trying
to liquidate
has been
I called the
the
banks
going under?
from people on the
subsequently,
Why not? The stories I heard,
have
would
business
of
the
side
operations
stoppedthe hearts of the public if
again?
trading
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
on.
You were seriouslyworriedabout
Schwartz
Marty
stated that
S&P
he
lost
$800 million
pit just before the
opening
one
of the biggest
a monster long
during
that
that
period.
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 your
for
about
thoughts
it. There used to
I hate
program
become
be
to move
power
the market, and the locals have
been successful. But
I hate
Some people say that
all
but
market,
to it and
trading isa bunch
of program
criticism
nonsense.
people.
idiots.
are
I can prove to any
one
of them
that they
are
idiots.
is something
closesnear
the
high
I would like the
or low of the
to investigate.
regulators
day
much
more frequently
the market has closed within
to. During the last two years,
the high or low of the day about 20 percent of the time.
that type of distribution is impossibleby chance.
Mathematically,
You
program trading as if it is immoral.
stocks against futures?
trading
talk about
about
unethical
Becausethe
they
floor
traders
program
do. You have the
so-called
it used
2 percent
of
What is
to
also have the other side of the equation
wall in investment banking, where
Chinese
the arbitrageurs and investment bankers on the same
I would
like the SEC
talk to each other. Well,
for fear they might
don't
want
to explain to
alongside
me
principal
they can allow
traders for the firm's
how
agency program traders sitting
own
account.
is (a) a case of
on inside
trading
trade. It is not
relative
signals
to futures,
and they
not
are
a program
has a
firm
or un-
are overpriced
stocks
when
a trading
doing
any customer
business\342\200\224
The market
than
For
and (c) an outright
computer program that
How do you prove it?
There
gave
just
frontrunning,
derpriced
No, they
in which
situations
Let me give you an example.Let'ssay
trade.
very intelligent
which
frontrunning,
a firm has information
about
a
time.
example, when the state of
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
information,
(b)
are
of
element
swap a day ahead of
debt/equity
New Jersey sold $2 billion
worth
The exampleyou
Well, they are idiots.
No, someof them
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.
this
271
wield
not just paranoid, becauseI've adjusted
I'm
accomplices.
ebb and flow in the
firms doing program trading
a natural
it. Those
killed
trading
extraordinary
of
[See Appendix 1
trading?
program
definition.]
Marty Schwartz
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
Let
me give
cent
discount
position
clients because their transaction
to themselves.
of their
costs
are
lower\342\200\224they're
not
commissions
paying
I keep trying
to separate
these
is no frontrunning
there
where
their
somebody trading
If that
is their
own money,
methodology,
things out. Let's take an example
or customer business\342\200\224just
to take out an arbitrage profit.
trying
why is it
worse
any
than
your
methodology?
it is a dumb game. Anybody
Because
earn
80 basis
points above the
idiots I tried to get away
from
needs to earn 80 basispoints
sell
flow,
them
which
who
on a basket of stocksto
yield
when
I left security analysis. Who
over
Treasury
this bill of goods becauseit
on Wall
puts
is an idiot! They are
T-bill
is a
the
the
same
hell
bills? The brokerage firms
way of creating more order
Street today has becomethe
ultimate
power.
Marty Schwartz
272
even for some entity
is wrong,
Are you saying programtrading
is not trading customer money?
I grew
up
a security
being
value.
something for
analyst,
things
analyzing
and buying
and
in
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 futures,
Trading
that
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,
and you are buying and selling.What's
difference?
I am trying
to earn
that style any more right than the style which
the market?
makes
What
when I trade.
infinity
to arbitrage
is trying
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 is their
a year,
and they find out
earning $300,000 or more
and can't get
the
bricks
when
are
are
worth;
hitting
they
really
they
Then it will have come full circle.
a job for $50,000.
they
no longer
are
what
Speaking
of circles,
Let's
on.
go
What
we seem to
stands
be
moving
in one
on this subject.
>
1982. I had
time was in November
gut-wrenching
net worth then, and I took a $600,000lossin one day.
most
smaller
What
in the
a much
congressional
time was one of the
the
Republicans
races. The market
largest
try
to get
That
is
all your losses back at
true
point
did much better than
ran
advances
up 43 points,
in history.
once,
you are most often doomed to fail.
in everything\342\200\224investments,
trading,
gambling.
I learned
from the crap table at Las Vegas to keep only X dollars in my pocket and
never to have any credit, because the worst thing you can do is to send
after
bad. If you can physically removeyourself
from
the
good money
which
is
the
same
in
futures
as
premises,
flat, you
thing
trading
getting
can see things
in a whole different perspective.
After
a devastating
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 4.
Is thereany
you
and
that you could isolate as responsiblefor
1982, loss?
Day,
when the futures
market
is already locked-limit against
market looks like it is 200 points higher is pretty
stupid.
to shorts
Adding
mistake
trading
Election
that
the cash
When
you look back, do you
I think
because
say,
\"Why
I had huge gains the month
biggest setbacksafter
happened?
It was Election Day, and
to make
out as your most dramatic trading
experience?
The
try
Do you
still
trading
principles
make
my
biggest
victories.
did I do it?\"
before.
I've
always
mistakes? By that, I mean deviations
consider
valid\342\200\224not losing
trades.
you
trading
had my
I was careless.
from
expected
which
I was short,
at that
and
You always make trading
mistakes.
I made one just recently\342\200\224a terrible
I was short the S&P and short
the bonds,
and I got nervous be-
mistake.
276
Marty
Why the difficulty
in
this
Schwartz
area?
to my fears of some cataclysmic
I'm
I think
it all relates
event.
like W. C. Fields: I have
several
bank accounts and a few safe deposit
boxeswith gold and cash. I'm extremely well diversified.
My thought
process is that if I screw up in one place, I'll always have a life
else.
preserver
someplace
Any other
If you're
Yes.
especially
than
you
thought
off staying
with
S&P
of?
ever very
nervous
and
about a position overnight,
and you're able to get out at a much better price
trades, you're usually better
possible when the market
the position. For example, the other day I was short
the
and got nervous becausethe
session. The next morning,
I was so relieved that
unchanged.
night
bond
the
I could
market
stock
was very strong
market was virtually
get out without
a loss,
my position. That was a mistake. A little later that day, the
When
your worst fears aren't realized,you probably
collapsed.
increase
What
your
on
That's my philosophy: January
1, I'm
poor.
Do you trade smaller in
It is just that
necessarily.
No, I always
success.
my losses
S&P
should
were just evaluated for a money management
deal.
records
Over my
My
entire career as a full-time
based on month-end data, my biggest
trader,
3 percent. I had my worst two months
was
around
the birth
drawdown
of my two children, because I was worriedabout whether
I was going to
get the tennis ball in the right place in Lamaze class.
My philosophy has always been to try to be profitable every single
I even try to be profitableevery
day. And I've had some
single
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
month.
before
April. I probably don't makeas much
money
I'm more concerned about controlling the
but
quickly
is greater.
in January?
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 not
position
plenty
of money
you have for
I felt
challenge.
that
working
money,
I wonder,
trading on your
what
with
own,
managing
you are in
after years of
possible
a
making
motive could
other people's money?
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.
How much
the pressure you feel when
puts you in a catatonic state.
managed
bothering
I was
Also,
because
clarity
greater
Getting back to
as I could because of that,
put
always
the
attention
my
more
losses
take
can
You
January?
I covered
has been your worst drawdown percentagewise?
downside.
slate?
the
position.
havea losingmonth
a clean
Do you take your
a weekend,
over
You start off every year with
Not
rules you can think
277
Schwartz
Marty
money
are
you going to be managing?
I don'twant
but I'm only taking
on one
to be specific about the amount,
I don't want to deal with
or two large pools of money.
multiple
deal
more money if I
I'm certain I couldraisea great
investors, even
though
went
with
a public
underwriting.
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,
You seem rather isolatedhere.Do
like
you
the year and in
took
to
a downtown
and
passed
significantly. Now, I have half a dozen peopleI talk
the phone daily. I've taught
to a number of them,
my methodologies
own.
they have methodologies of their
diminished
to
best advice you can give to the ordinary guy
a better trader?
you ever tried training
I hired
four
but nobody
people,
tried to clone
myself
methodologies,
but
can't teach them
people to be traders
and
lasted. They all
the intellectual
learning
became
I taught
side is only
work.
didn't
it
working
your
the
mistake
for you?
I
my
of it. You
they
would rather lose money than
is the ultimate
out
when
hell
What
I'm
with
I became a winning
do you tell people who
for
out
trader
my ego, making money is more
I always try
business
even.\" Why is getting
the ego.
protects
of a trader
rationalization
successfulthan
I have the
freedom
can go on
vacation
you
your
I tell them, \"Think
wrong. What
position? \"I'll get
they're
a losing
even
so important?
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
I was able to say, \"To
important.\"
people that are thinking
to encourage
themselves.
seek
admit
in
into this
become more
happened
and
to get
your
capital.
their bets as soonas they
wiped out.
money is not
your
position
Most people
start
making
make
money.
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
to me.\"
I
structurally.
Beach half of
story
should
have met with
failure.
Schwartz's
traders.
How did he do it?
There
a methodology
worked
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
found
Why do most traders losemoney?
Because
of increasing
That is a quick way
Marty
stomach.
your
in making
on
all
part
thing
get out of hand. Also, don't increase
to
trying
and
intimidated.
them
The most important
losses.
losses
size until you have doubledor tripled
at trading
Have
lifestyle.
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
the other half. I have a wonderful
York
New
My kids think all fathers work at home.
Leam to take
alone?
working
279
Schwartz
Marty
that
were
two essential
for him.
his
on any trade. No doubt,
point\"
as
well
after
size
losses,
position
large
sharply
to his success. The
extended winning streaks, contributes heavily
size
after
a
rationalefor
position
destabilizingloss is apparent.
reducing
control by
always
approach
of
knowing
his \"uncle
reducing
as
Marty Schwartz
280
However, the
reason
deserves further
experienced
his
for the
majority
a winning
for taking the same action after
streak
As Schwartz explains it, he has always
elaboration.
biggest
losses after his biggest gains.I suspect
of traders.
Winning streaks lead to
this
complacency,
and
leads to sloppy trading.
cite similar rules (such as disciplineand hard work)
as the reasons for their success.
it is always a treat when a top
Therefore,
with
trader provides a rule that is unique 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
complacency
Most
direction
traders
of the original
position.
Part III
is true
A Little
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 the
he
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
Jr.
made in my letter, indicating
that I was interested in great
traders
rather
than great investors.
As
I use the term, a \"trader\"
be primarily
would
concerned with
which
the stock market washeading,
direction
while
an \"investor\" would
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
Jr.
What made you
so
bullish
Thebull market
had
started
at Rogers' home, a baronial,
furnished
eclectically
on a fall-likespring
The atmosphere
afternoon.
seemed more
reminiscentof a comfortable
English manor than a home in New York
City. In fact, if my only exposure to New York City was that afternoon's
arrived
conversation with Rogers
in his antique-filled
with its
room,
sitting
views
of
the
I
would
conclude
that
New
York
Hudson,
pleasant
City was
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.
note on which
is the
As I told you
in our
I remember
when
the
following
interview
begins.
a trader.
phone conversation, I don't consider
myself
to buy German stocks in 1982,1
said to the
I went
broker, \"I want you to buy me X, Y, and Z stocks.\"The broker,
who
didn't know me, asked,\"What
do I do next?\" I said,\"You
the
stocks
buy
and send me the confirmations.\"
He asked, \"Do you want
me to send
some
I
research?\"
\"Please
do
don't
that.\"
He
\"Do you
said,
you
asked,
me to send you opinions?\" I said, \"No,
want
don't.\"
He
no,
asked, \"Do
you
want
me to call you
prices, becauseif you
tripled, I might
be
with
prices?\"
I said, \"No,
these
do, once I see that
to sell them. I plan
tempted
stocks
to own
don't
even
give me
have doubled and
German
stocks for
bull
years, because I think
you are about to have the biggest
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.
at
least
market
on Germany
at that time?
here in August 1982. More important,
the previous
since
kind of bull market
all-time
had
market
in
1961,
twenty-one
years earlier. The German
high
In
the
then.
since
and
had
crumbled in 1962
essentially gone sideways
value
basic
was
So
there
had
boomed.
meantime, the German economy
there.
I'm
or sell something, I always
try to make sure
I'm
then
first. If there is very good value,
to lose any money
even if I'm wrong.
not going to lose much
money
I buy
Whenever
I
This
not had any
had
Germany
interview.
townhouse,
28S
B. Rogers,
James
not
going
probably
But you could have
market
that
bought
ten years earlier on the same
theory.
That's
absolutely
thosereasonsand
it in 1971 for exactly
right. You could have bought
stocks sit for ten years, while we had
German
watched
You
But this time there was a catalyst.
the
At
the
time,
catalyst
happen.
a major
bull market
always
need a catalyst to make big things
in
the
U.S.
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
investment.
Was the election a toss-upat the
time?
three
Not
in my mind.
I mean in terms
of the
I guessso,because
tot same day.
when
polls.
the conservatives
did win,
the
market
exploded
286
James
What if they
had
I still didn't
think
Jr.
lost?
James B.Rogers,
have
before.
I had
and that
lost any
Yes.
that there was going
every anticipation
the bull market
would last for two, three,
will
years.
trade.
Yes,
when
conviction
I don't bother
do; otherwise,
doing
it. One
of the
best
rules
can learn about investing
is to do nothing, absolutely
nothing,
is something to do. Most people\342\200\224not that I'm better than
most people\342\200\224always have to be playing; they always have to be doing
something.They make a big play and say, \"Boy, am I smart, I just tripled
else with that
my money.\" Then they rush out and have to do something
money. They can't just sit there and wait for something new to develop.
anybody
there
unless
Do you
you
give
always
wait
ever say, \"I
it a shot\"?
think
What you
just
for a situation
described
is money
market
this
there
there
and pick it up. I do nothing
in the
something to
way.
make
lying
to line up in your favor?
Don't
going to go up, so I'll
in the
of any
examples?
after they had gone straight
Yes. Two yearsago, I went short soybeans
is because that same
so
it
I
remember
reason
to
The
$9.60.
vividly
up
of whom
was
one
of
to
with
a
I
dinner
traders,
went
group
evening,
\"I really
I
he
had
said,
reasons
the
about
all
soybeans.
bought
why
talking
all I know is that
all the bullish arguments are wrong;
can't tell you why
I'm
shorting
hysteria.\"
How do you pick the time
I wait
until
In the
midst of it all,
I just wait
to the
move,
for
poorhouse.
corner, and all I have to do is go over
in the meantime.
Even people who lose
say, \"I just lost my money, now I have to do
it back.\" No, you don't.
You should sit there until
you
market
find
No, I don'tknow
1980,
the
you
Yes, I sold
Trade as little as possible.
gold
gold
you wait
a reversal day?
reversal
is why
someonewho
I don't
waits
think
of myself
as a trader. I think
for something to come along.I wait
like the proverbial\"shooting
fish
in a barrel.\"
of myself
for
for
some
sign of an end to the
days.
example of hysteria. In late 1979-early
an incredible accelerated advance.
witnessed
that market?
at $675.
That was almost $200 too
That
the hysteria?
a classic
market
go short
go against
or do
about
That brings to mind
Did
something.
example,
to
starts moving in gaps.
the market
is probably
is a very fast way
until
money
other
you put on a
Can you think
I usually
oriented?
Occasionally,
going the
like you have a great dealof
It sounds
trades fundamentally
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
287
Jr.
Are all your
I would
reasons I mentioned
to be a major
change,
or four
B. Rogers,
early!
as
a situation
that is
I told
only
you I'm not a good trader. I'm nearly
about four days before the top.
always
too early,
but it was
James B. Rogers,Jr.
288
I didn't say
been a pretty
it must have
way off timewise, but pricewise
When you do a trade like that,
isn't
there
were
you
ride.
scary
James B.Rogers,
The reason
I asked is that
between
and
Yes,
Yes,
gold
where you have secondthoughts?
a point
it goes to $676 [he laughs].
when
But you
Does
because
case,
last. It was the
market's
gold
Was that a matter
final
Both.Gold was
think
of hysteria.
it was\342\200\224Ilike
your
Just about every time
you
go against
you see panic, do you
go against
automatically
it?
The panic,the
to
see
in and of itself is only
a catalyst
to make me look
hysteria,
is going on. It doesn't
mean I'm going to do anything.
In the
what
case of the
gold market,
1980
early
bearish for gold. Volcker
Chairman a
months
few
and I knew that
because
you
that
of the world that was
the Federal Reserve
we were going to beat inflation.
to be bearish
on oil at the time,
went down, gold would go down
thought
the
time, everybody
But, did you
I knew
just
earlier and said that
if oil
believe
in
that
it was
not true.
the rest
that
as
well.
and oil should move together, or
gold
rest of the world believed that?
the
world
I usually
main item then
break
going
to
down
anyway
do a trade based on a
make
any sense, simply becauseyou
really
sometimes
of the world believesit?
believed
the relationship
that.
was true?
like to look at
was
that I thought
Volcker meant
the back of inflation.
was just the
is the
I think
what
The
fact,
it when
the truth.
that oil was ready to
fact
The
he said he was
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,
It is amazing how sometimessomething
Absolutely.
important
will
I am experienced
and the market will keep going despite
Now,
that
enough to know that just because I see something doesn't mean
sees it. A lot of peopleare going to keep buying or sellingjust
everyone
becausethat has been the thing to do.
that.
happen,
the
So,just because
October
the
such
as
isn't
important.
market
present
if it
doesn't
keeps
Fed
going
is a hysterical blowoff, then
itself.
to some important news,
doesn't mean that it
policy,
respond
1979 change in
All the better. If the market
especially
that
doesn't
know
I had a view
become
because you thought
Was that
At
had
he meant it. I also happened
I believed
mean you will
that
Rarely.
its
of gold being overpriced?
but basically
overpriced,
of a market in
be right if you can stick it out.
will
So when
the fingerprint
of
terminology\342\200\224the
\"fingerprint\"
couldn't
that
of time, gold and oil
period
dying gasp.
recognizing
or was it a matter
blowoff,
panic, you
it was chaos. It was something
short
together.
relationship
you
Yes, in that
I have
always felt that the relationship
oil was a coincidental correlation.
all it was. For one very
was
that
moved
the trade?
with
stayed
289
Jr.
the way it shouldn't
you
know
go,
an opportunity
will
James B. Rogers,Jr.
290
Can you
of a more
think
Yes,October
19 is my birthday,
October
1987.
and the
of 1987,1
Did you have any
that
idea
the break
could be as largeas it was?
interviewed me in January
told him,
1987,1
\"Somewherealong
the way, the market is going to go down
in one
300 points
He looked
I were a madman. I envisionedthat
at me as though
the
day.\"
John Train
When
would be around
300 points would only be 10 percent.
12 percent in one day. Ten percent in
one
the kind of markets we were
day was not such a big move, given
then.
The
market
had
seena
number
of 3, 4, and 5
having
already
percent days.
So I said, \"Why
can't
the market go down 300 points in a
it would
be 508 points.
day?\" Little did I know
Dow
In 1929, the
market
and
3,000,
went
down
Why
pick 1937 as a comparisonin
you
for a
prediction
your
world.
the
the atmosphere. Money was flooding
Every stock
market in the world was at an all-time high. You had all these stories of
a million dollars a
half
three years out of school,making
young
guys,
in
a
are near
Whenever
see
that
That
is
not
market,
you
reality.
you
year.
for
a
into the summer
a top. So, I went
collapse.
positioned
you
short
I was
short
stocks
another fast way
the Dow
was that we were going to have a major,
horrible
to
say
went down 49 percentin
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
convinced
between
we were
on
as
opposed
fast,
deep,
when the market went
to 1929-1930?
to be a major depression.I knew
When
did
you
the
a financial and economic collapse.
cover
week
everybody thought
poorhouse.
options
Buying
for
the SEC
is
and
you
cover
your positions?
of October
that
19. If you
the financial
remember,
by
that
time,
structure of America was over.
then because we had hysteria going the other way?
we
of hysteria. Under
case
right. That week was a textbook
to step in there
have
if you are still solvent,
you
time
it was the end
one
it.
to
be
the
that
was
and go against
Maybe
going
But
95
of the world, and I would have been wipedout too.
percent of the
That
were
is exactly
those kind
time
by a major financial collapse. I was
I was differentiating
going to have a depression.
caused
options.
Someone did a study
What I
months.
50 percent,
down
not
six
and short calls. I don'tbuy
to the
discovered that 90 percent of all options expire as losses.Well, I figured
out that if 90 percent of all long option positions lose money, that meant
make money. If I want to use
that 90 percent of all short
option
positions
options to be bearish,I sellcalls.
Did
was trying
or long puts?
stocks
Were
stock market collapse?
Becausein 1937,
collapse?
It was
During
did
291
Jr.
Why were you expecting a financial
recent example?
end
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 1986
B. Rogers,
James
when
of conditions,
you go against
that
money.
BetweenOctober1987and
That
was one of the
few
of hysteria,
January
1988,1
you are going to make
didn't have any
in my whole life that
shorts.
have any
I always try to have both long
or bearish,
case I'm wrong. Even in the best of times,
times
shorts. Whether I am bullish
and short positions\342\200\224just in
kind
I didn't
JamesB.Rogers,
292
there
is always
somebody fouling
there
is somebody
doing well.
Are you implying
to be
wanted
you
that
after
up,
and
Jr.
I was
even in the worst of times,
find any stocks
short?
So all those guys who came in on Monday to sell had very, very good
to sell, and there were no buyers around. Therewere no buyers,
there was no reason for people to buy. Even the buyers were
because
reasons
scaredand
I thought
that
away,
everything
if I were right
the world
wasn't coming to an end right
that I
stocks
those
was going to go up\342\200\224including
In
seams.
at
the
were
[
1988],
January
coming
apart
knew, fundamentally,
I started putting
and
a couple
of shorts back on, and even though
money on one of those shorts,
comfortable having
the
protection
happy to do it because
of some short
positions.
1 am
of people blame the October1987breakon
A lot
program
I am
losing
I feel
more
trading.
Do you consider that scapegoatism?
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
market.
Politicians
19, but
no
people
buyers.
I remember
why
I became
even more
bearish on the
weekend
Alan
Reserve
19. The weekbefore, [Federal
Chairman]
much
better
was
the
of
trade
balance
announced
that
getting
Greenspan
and things were under control. Two
later, the balance of trade
days
of the world.
in
the
worst
the history
were
came
and
out,
they
figures
doesn't
have
either
fool
or
liar.
He
is
a
a
I
\"This
said,
guy
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
before
October
the dollar
go, because the Germans
by letting
monetary and fiscal policy as Bakerhad demanded.
like the trade wars of the 1930sall over again.
it
to the
loosening
Germans
weren't
It looked
already short! I calledSingaporethat
to add to my shorts. [Singaporeopensearlier
we do.]
than
in a panic\342\200\224and I was
night
Sunday
the collapse, you couldn't
293
James B. Rogers,Jr.
that
bearish
Monday.
Are you saying the crash was causedby
and
Greenspan
Baker?
There were a lot of causes:Greenspan,
the fact that money was
Baker,
the
of
the
of
balance
trade, and you had a market
tight,
steady worsening
that had spiked up to 2,700 six weeks earlier. If you check, you will see
were going up, the rest
that,
1987, while the S&P and the Dow
during
of the market was quietly
eroding
away. In December 1986,1 shorted
the
financial
stocks,
and throughout
though
the Dow and the
Were
there
Yes,
one
me
about
S&P
were
1987,1 didn't loseany
going through
even
money,
roof.
the
any times you faded hysteria and lost?
of my
greatest lessons happenedin
bear markets. In January
1970,
all the money I had\342\200\224which wasn't
options,
I took
puts.
In May 1970, the
bottom,
I sold
market
caved
my puts. I had tripled my
my
a time
early
days and taught
when I still
very
bought
much\342\200\224and
bought
in, and the day the market hit
I was a genius! \"I'm
money.
going
to be the next Bernard Baruch,\"
I said to myself.
to rally and this time to
My plan then was to wait for the market
sell short instead of buying
so that I would make money faster.Sure
puts
the market
I had and went short.
rallied, and I took everything
enough
Needless to say, two months
later, I was completely wiped out because
I didn't know what
I was doing.
One of the stocks I had shorted was Memorex. I soldMemorex
at
48. In those days, I didn't have
the staying
power\342\200\224psychologically,
I ended
and, most important, financially.
up covering my
shorts at 72. Memorexeventually
went
to about 96 and then
went
straight
down to 2.
emotionally,
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
I was
Jr.
flat-out,
perfectly
know about hysteria.
did
What
learn
you
from
that
That the market is going to go higher
it will.
I think
everybody
any
I had a tendency
it. I would
knew
think
just read things
that if I knew
in the
What I now know is that
information.
inside
to
it can and lower than
I think
than
So
something,
I didn't have
don't know what
paper;
they
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
if the stock market falls
even
see the
doing
well?
Absolutely. Unless the
politicians
economy
looking
for
have
already
seen?
we
Yes, eventually
a very
I expect
Do you expect a very
The
Right
now
[April
However,
the
1988],
recession
trade
another
looking
mainly
we get a financial collapsewithout
actually
for a financial
you
collapse.
example
before.
dollar keeps
I don't
getting
expect the
weaker\342\200\224which
American economy will
do
economy
is what
a very serious
having
well\342\200\224steel,
I used
to collapse
1937 as an
the magnitude
of the
can
be done at this point?
The
basic
than
it is saving.
problem
and this will
again,
eventually
deficit?
trade
the
deficit
is there
problem,
in the world today is that
You need to do everything
and investment:
Eliminate
dual taxation
of dividends;
textiles,
parts
you
can
anything
are
not
deficit.
that
of the
mining.
investing.
401Ks.
is consuming
more
can to encourage
saving
America
you
of savings, the capital
gains tax, and
the
back
more
incentives for
attractive
bring
At the same time, you need to do everything
taxation
to utilize
consumption. Change our tax structure
taxes consumption
rather than saving and
there
are lots of
government
spending dramatically\342\200\224and
to discourage
a value added tax,
because as the
I expect\342\200\224many
agriculture,
worse
dollar crisis.
see as the main cause of
IRAs, Keoghs,and
lots of times. That is why
the financial collapse?
an economic
it into
recession?
Sure.It has happened
it up.
low, you can still
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
collapse.
Can
do
Given
I'm still
foul
will start getting
figures
as well?
may foul it up and turn
politicians
low.
1987
October
to trigger
is going
What
What
deep
the
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.
pronounced bear market beyondwhat
the market to break the
October
below
taxes,
Raising
precipitate
Are you
295
By doing what?
experience?
particular
James B. Rogers,Jr.
Cut
which
ways of doing it without
hurting
the economy
too badly.We
would
have
James B. Rogers,Jr.
296
problems,but
the
are
would not be nearly as bad as when
they
the bullet,
then we are going to have a
problems
on us. If we don't bite
forced
1930s-type
collapse.
answer
Your
specific
there are relatively painlessways
\"dramatically.\" Could you provide
that
implies
spending
examples?
government
to
two
governmentspends
$5 billion
this
their
country
examples;
guns
army
of occupation
weren't
from us, because they
don't
have
a very good defenseindustry
about
those
those
are very unlikely
actions.
No politicians
solutions.
it is not
They
has
to
be more
That is
going to continue until we are forced into solving our problems.Then it
is going to be a disaster.
If the
politicians
keeping
election.
It
act, do we eventually face a choicebetween
or a deep recession?
don't
high
inflation
is going
to be an
are
I suspect will
What
extreme.
happen\342\200\224and
I am
just
speculating, I don't have to make this decision yet\342\200\224isthat somewhere
the politicians will say,
along the line a recessionwill develop.
Initially,
\"We've
got to bite the bullet and suffer through this. This is goodfor us;
it will help clean out our system.\"
People are going to buy that for a
while. Then it is going to start to hurt. Then it is really going to start to
hurt. At that point, the politicians
are going to give up, and they
are going
to start to inflate
out at that
their
way out of it. But
is to really print
money!
point
scenario, we start off
In that
Right, but
real
very
we
a recession
with
have wild inflation
could
is that
possibility
three years forward
What
will
we
to inflate
way
your
and end up with
very
deflation. Another
have exchange controls.
investment
decisions
for two or
first
and then
eventually
have to make my
I don't
Fortunately,
By
the only way
inflation.
high
now.
right
kind of exchange controls?
exchange
controls
I mean limitations
go to Europe, you
can't
of the country
without
What happens to the
that?
are even talking
that.
With the present cast of jerksin Washington,
I understand
to foul things
are going
up.
going to happen. The politicians
to be done. They are going
their votes and winning
the next
to do what
about
out
establishment.
But
going
concerned
very
forty-three years ago! Most people
was made to send
the decision
even born when
but sitting around,
there
our troops to Europe.
They are doing nothing
fat, and chasing girls. The GAO has said that we
beer,
drinking
getting
war in Europe. Yet
don't have enough bullets to fight even a thirty-day
those guys there. I would submit
us $150 billion a year to keep
it costs
those
a year and bring
billion
to you that if we stop spendingthat
$150
the
themselves.
And
kicker
defend
troops home, the Europeans would
is: Do you know who they would buy their guns from? They would buy
sent there as an
in
not
297
cut
some
I could give you a dozen. The U.S.
a year to support the domestic
price of sugar so
when
it is selling
Americans
can pay 22 cents a pound
that
wholesale,
We
would
dollars!
8
centsa
in
world
market.
billion
for
the
Five
pound
told every sugar grower, \"We'll
be better off if the government
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
all be paying less for sugar.
do you know what our
If you
really want to save a big number,
and fifty billion dollars. Do
of trade deficit is? Onehundred
annual balance
know
American
what it costs us each year to keep
troops stationed
you
American
in Europe?
One hundred and fifty
billion
dollars.
troops were
I'll give you
James B. Rogers,Jr.
the
dollar getting
weaker
government's
values
relative
The dollardisappears.
What
on
capital
flows. If you
to
want
more than $1,000. You can't ship money
take
would
and weaker.
bring
approval.
of currencies
on exchange
The politicianswould
in
a situation
like
controls is the
then
try to bring
JamesB.Rogers,
298
exchange controls, which
in Draconian
would
just
make
Jr.
the situation
James B.Rogers,
But, sooner
299
Jr.
or later, the
market
bond
collapses.
worse.
you say disappear,
When
like the
are you
don't
You
talk
becoming
peso?
Argentine
it happen? Remember
couldn't
damn
about
a greenbackdollar.\"
a
give
Why not? Why
\"I
the dollar
about
talking
the
Civil
the collapse of the dollaras if it's
about
In 1983, we were the
largest
creditor
nation
War
expression,
an inevitability.
in the world. In 1985,we
becamea debtor nation for the first time since 1914.By the end of 1987,
all of the foreign debts of every
than
our foreign debtswere greater
nation
south
Argentina,and
of the Rio Grande put
together:
Brazil,
Mexico,
Sooner or later, we repeat the English experience of not
bond market. But I don't know when sooner or later
having
is. It could be three years; it could
be ten.
Absolutely.
a long-term
How far did Britishbonds
fall
in the
situation
you are referring to?
About
70
What
kind of things do you look at in deciding which scenario will
first: deflation
or inflation?
happen
percent.
Peru,
Moneysupply,
all the rest.
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
Can I paraphrasethe
meaningful
continued
chain
of events
you imply as follows:Nothing
situation.
be done to change the budgetdeficit
that
the
trade
deficit
will
deficit
guarantee
budget
will
bad or even gets worse. That, in turn,
or
sooner
later, the dollar will come under extreme
situation stays
Absolutely. That's why
I'm
guarantees
The
that
pressure.
and others
market
bond
fit into this scenario?
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
You
some
decide to bite
might start out with lower rates first if the politicians
will
But
a
recession.
then,
eventually
give up
they
by having
the
bullet
and
start printing
money.
in.
we are on the topic of
While
How doesthe
get thrown
not long the dollar.
outlook
for
In 1934, they
declined every
down
do you
have a long-term
because
of gold at $35 an ounce and gold production
1935 and 1980. Productionkept going
year
there was no incentive to lookfor gold. During that whole
set
the price
between
forty-five-year period, the
especially
scenarios,
gold?
during
the
consumption
1960s and 1970s, when
of gold
kept going up,
the electronic
at the same time, the
we
had
got bigger and bigger, while
supply
down.
You would
have
had a great bull market
in gold in the
going
what.
Even if inflation was at zero percent,
1970s, no matter
you still
would have had a big bull market
in gold during the 1970s,
of
because
demand.
and
supply
revolution.Demand
was
300
James
The situation
like
taking
has
changed
to $875
$35
Jr.
in the 1980s. There is nothing
entirely
the price of gold from
B. Rogers,
to make peoplego into the
year since 1980. Just
every
Gold production has gone up
for mine openings and expansions,gold
projections
to go up every
is scheduled
year until at least 1995. At the
production
in the recovery
same time, there have beenmajor
advances
technological
there
is
for
In
much
more
available
than there
short,
gold
processes gold.
used to 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
gold
business.
based on
James B.Rogers,
In a situation
301
Jr.
like that, I would
the price of gold would go up
to disruptions in mine
think
sharply,because the panic
of
related
the revolution
is going on, the
production.
known
While
will go down. Themove
will
ask,
buy
after
also
bring
down
go up, but after that, it
confuse everybody. They
down?\"
But you will want to
of the revolution will
euphoria
will
price
will completely
\"Why is the price of goldmoving
that move down, because the
chaos.
We have talked about your
long-term
and
bonds,currencies,
Any
gold.
for the stock market,
about oil?
views
thoughts
today.
The supply/demand
negative. But if you
picture you
put
your own words, \"the
are
that together
dollar
for gold is obviously
in which, using
a situation
painting
with
disappears,\"
wouldn't
such an event
swamp the internal supply/demandbalanceof gold?
Certainly,
do worse,
In
other
It may do better, it may
power.
gold may keep its purchasing
but it's not going to be the best market.
words,
gold was yesterday's inflation
Yes, when
price
for
Given the
scenario
you are talking about\342\200\224the stock
the
dollar going down, etc.\342\200\224isthere anything
going down,
average guy can do to protect himself?
else
about
add something
gold. Remember that threeI
where
there are always pieces
was
about,
puzzle
talking
Don't forget South Africa in that puzzle. Gold
and added.
beingremoved
is more complicatedbecauseof the South African situation. I fully
that the
Africa to eventually blow up, becauseI think
expect South
governmenthas
tomorrow
itself too far into a corner. If there were a revolution
painted
whites would
African
and the blacks took over, the South
dump all their
gold.
So the
general
market
that the
European
and Far
Eastern currencies; buy
Treasury
bills;
buy farm
land.
How did you
first
get interested
in trading?
decades.
I should
dimensional
down.
mind saying
that.
It certainly is going to go under $12. Whether
is
that
of
oil
was
$11 or $7 or $3,1don't know.
[The
price
approximately $16
at the time
of this interview.]
Buy
always fight the last war. Portfolio managers always invest in
the last bull market. The idea that
has always been the great
store
gold
of value is absurd. Therehave been many times in history when
gold has
power\342\200\224sometimes
it will some day\342\200\224the
guarantee
You can put that in writing;
I don't
hits\342\200\224and I
hedge.
Generals
lost purchasing
recession
the
of oil is going to go way
price would 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 Oxford during
summer,
all the Americans I knew
at
more interested in
the Financial
reading
Were you trading while
were
I was an odd lotter.The
lightly.
Very
you
Oxford
Whereas
1964-1966.
were interested
in
politics,
the
at Oxford?
I was
investing in the
If I had
laughs]
So
actually
you
lost much money in either
of those
started making moneyright off
the
on August 1,1968, right at the top. But I still had
market
left, and in January
1970,1
figured out it was going to be a
know how I figured it out. As I mentioned earlier, I
I don't
bear market.
I had and bought
all the money
took
By May, I had tripled my
puts.
and
I
In
started
stocks,
by September, I was wiped
shorting
money. July,
out. Those first two years were great: I went from being a genius to a
I came into
market
money
Not exactly deeppockets.
[He
in anything.
Successfully?
money at Oxford.I would get my scholarship
of the year and invest
as long as I could.
beginning
in the stocks you were covering?
investing
you
I invested
was my scholarship
at
Were
I was
Times.
money
303
James B. Rogers,Jr.
some
two years\342\200\224
fool.
bat?
Soyou
the
money
were
back
to ground
zero in September 1970.What
happened
then?
That was the bull market
Yes, I was making
money.
the
time
I left Oxford in the summer
of 1966, the bear
but
I had
of 1964-1965.
market
already paid off my bills. I was lucky.If I had
during 1965-1967,1 probablywould
What happened after
have
gotten
By
had started,
gone
to Oxford
wiped out.
to work
to say, \"We
put
the
need
money
a sofa.\"
need
everything
a TV.\" I said, \"What
do
I could.
we need
a TV
spirit
personified.
Were you
kind
get
on Wall
Street?
Junior analyst.
Machine
advertising
build
their stores,
stocks
at this time?
I didn't care
entrepreneurial
up great retail chains,
I was plowing
everything
agencies.
just
commodities.
day
one.
almost
Currencies
these
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
as much money in dollars
and it did\342\200\224a
devalue sterling
year
any day. I knew it was coming,
Even then, I had a strong
I left. Once again, I was a little early.
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 then
who
into
did you get involved in
When
awarenessof
Covering what
trading
I traded all of them
while.\"
of job did you
the market.
rid of me. I was the
Just like those guys
Bonds,stocks,currencies,
from
What
got
into
I
My first wife
a TV for? Let's
in the market, and wecouldhave ten TVs.\" She said, \"We
I said, \"We could have ten sofas if we just put the money
in the market for a little
or a sofa. The wife
about
back
back
on Wall Street. I invested
went
and put it
I had
everything
back
and plow everything
into the market.
Oxford?
I was in the army for a coupleof years,
and since I didn't have any money,
I couldn't
follow the market.
In 1968, the day I got out of the army,
used
I saved
304
B. Rogers,
James
nalT I said, \"One
of the
first things I read is the
page.\"
commodity
Jr.
The
because
he did too. This wasbackbefore
guy was stunned,
commodities
were commodities.
He offered me a job, and when I turned him
he almost strangled me. This
already
trading
zero in
pickingup tradingwise
to
September
1970,
up to your
build
did you start
where
ultimate trading success?
taught me a lot. Sincethen\342\200\224Idon't
losses
early
My
was in 1970, and I was
interview
commodities.
from ground
Going
down,
job
like to say this kind
very few 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,
going to hurt you.
of
thing\342\200\224Ihave
made
James B. Rogers,Jr.
Did
and George
you
No.If you
you have a losingyear after
that
get started?
and
We
partner.
junior
partner,
one secretary.
How did you know George Soros?
because
Did
you come up with the idea, for example,
the timing of when to doit?
he decide
did
sort
Yes,
for him at Arnhold
and S. Bleichroeder.
new brokerage firm regulations did not allow
a percentageof the trading
kind
understand
of trading
it, that fund
We invested in
long
and
trader
and I was
shorting the dollar,and
of.
if you disagreed on a market?
What
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
always seemedto come
to work
had
to
We left
you to get
but we couldn't
profits. We could have stayed,
have managed money. So we
started our own firm.
What
of labor,he was the
There
Fund
George Soros was the senior partner, and I was the
started off with one senior partner, one junior
1973
the division
analyst.
So,
How did the Quantum
in
down
broke
point?
No.
In 1970,1went
make independent trading decisions?
the
Usually
Did
305
left
We
leave\342\200\224fortunately.
differently
you were trading leveragedproducts
When
currencies, how did you
short\342\200\224all over
bonds,
currencies,
the world.
what
your
as commodities
and
allocation was?
to the hilt. When
of money, we were always
leveraged
would
look
at the
we
of
ran
out
and
money,
something
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 bought
Fund?
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,
stocks,
determine
such
and
Until
did you do for the Quantum
was managed
from
together.
commodities,
everything\342\200\224
a very
amoebic
portfolio.
James B. Rogers,Jr.
306
the risk of your positions on an individual
lost money in one market and had to reduce your
market?
might
just as easily cut back in another
evaluated
never
You
basis?
So, if you
portfolio,
you
Right. We would
always
attractive
in the portfolio.
positions
Even today, that
I
sounds
it was
imagine
on what
cut back
like
thought
a very unconventional
unique
probably
we
terms
in
was
certainly
unique.
I still
don't
admit, I find it amusing
in my
\"How
do
I have
the same
I don'tseehow
what
of its investment
strategy.
you
can invest
in American
Malaysian
palm
part of a big, three-dimensionalpuzzle
How do you
the
reading
anybody,
and people
steel without
understanding
say,
question.
is going on in
find
enough
itself
seems
I do not do it nearly
a great deal of time
oil. As I explainedbefore, it
that
is always
is all
changing.
time to spend on all thosemarkets?Just
to be a monumental
chore.
as I usedto. Over the years, I have spent
a
lot
of stuff into my head. I have developed
pouring
a great 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
as actively
bull
for so many
years.
market
in cotton
1861,
I
start
by
caused
you
learn
finding
the anomalous
like
in
to $1.05.
When I seea picture
you say you are retired.
retirement, I'm more active than
you follow all these things?\"
Now
cotton went from \\ cent
when
great
times,
fund. Backthen,
know
when
I knew about the
so many
How do you find out about a marketlikethat?
and I still do all these markets. People say to me, \"You're retired? We
have a full staff and can't even keep up with all these markets. What do
are short stocks all over the world!\"
you mean you are retired?You
I must
example,
stock books
were the least
anybody who trades all the
markets.
all the currencies,
commodities,
By all the markets, I mean
bonds, and stocks\342\200\224long and short\342\200\224alloverthe world. I am retired now,
It
an
and
bond,
commodity,
As
307
B. Rogers, Jr.
James
years in
a long-term
historical
chart.
\"What
1861 cotton market, I ask myself,
I
to
it
out.
Then
From
that,
happen?\"
try
figure
the
that? Why did that
amount.
an enormous
In fact, one of
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
the
courses
\"Bulls
and
been,
and they always will
be.
308
James B. Rogers,Jr.
I guessthe
is a prime recentexampleof
1987
stock market
time is going to be different\"
and
developing,
for
again. In 1968, one of
learned
thesis on why
the
bull
market had
why
great
there was a shortageof stocks
up
years\342\200\224right
at the
all over
top. In 1987, you
While
editing
magazinestory
Exchange
current
(August
example
this
about
p. 29). One could hardly
of \"this time is
going to be different.\"
comes
actually
The explosive growth
the boom could
go bust.
worries
The
some Western
financial
this
value.
begins
of the
interview.
experts,
who fear
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
manner.\"
Such worries
attribute
the
companies
high
are
groundless,
price-earnings
to understate earnings
argue analysts in
ratios in
to keep
part
Tokyo.
to accounting
The Japanese
rules that
their taxes lower. Another
rise.
purchase
some
when
starts
peope
to go
The whole processthen
gets
it has
because
it
repeats
overpriced
tremendously
becausethe fundamentals
are turning
more and more peoplesell.Next,
on the downside. The market
itself
and it starts
to go down.
poor. As the
More peoplesell
economics
deteriorate,
because it has
been
the
knows
it is going to go to nothing,
thing to do. Everybody
Then the market
the hysteria stage and gets very
reaches
underpriced.
That's
when you can buy it for a pop. But for a long-term investment,
base.
have to wait a few years and let the market
you usually
sell.
people
sell just
so they
Talking
sold a 1\\
about extreme bull markets, I recently
acre
plot
$250,000 twenty-five
years
[During 1634-1636, a speculative frenzy
causing such an enormousriseand collapse
the event
is still
read
that
for $450 million
Is
the
ago.
Japan
tulipmania
in Tokyo
famous
in
Australia
that
bought
they
of our
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
so their
propping
is very low, there comesa
a market
in a Time
subject
up slightly later in
the same cycle. When
always
market
for a better
ask
cases of market
different
between
similarity
Stock
[he
of money\342\200\224
Tokyo
It's
time
everybody
item
the incredible
8, 1988,
Japanese stockmarket
that
I came across the
following
bull market on the
chapter,
of
hysteria?
become undervalued. The
buy
and
more
up
people buy because it is a
sound
or
because
the
charts
look good. In the next stage,
fundamentally
thing to do
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,
started
again: \"There is a shortageof stocks,
because
is buying
in all this stock.\" At the
bottom
of the bear market
a laugh that builds
there is going to be a
steadily]
shortage
I assure
you\342\200\224with a gigantic
surplus of stocks.
hearing it
Is there a lot
309
\"this
There was going to be a
of stocks
shortage
Wall Street houses published a
major
to keep going
Jr.
complacency.
Right.
the
the
B. Rogers,
James
prices
I guaranteethat
collapse\342\200\224possibly
the
Japanese
the
within
going to go down 80 to
are going to go down
stock market is going to have a major
of our stocks
next year or two. Many
in the bear market.
90 percent
80
to 90 percent.
A lot
are
more of theirs
310
JamesB.Rogers,
Is there
any way
the
can take advantage
U.S. trader
average
Jr.
of that?
Wouldn't
you
Japanese
puts.
You
them.
can short the
Japanese
index, which trades in Singapore
Most American brokerscan do it for you. There are at least
Osaka.
major Japanese
Board
stocks, short Japanese
short Japanese calls, buy
indexes,
A lot of Japanesestockstrade
here
and you can just short
corporations which
have
traded on the Chicago
a collapse is coming, you
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
was a very clear exampleof
Although that market
I didn't
hysteria,
short it. I thought
it that long [he snaps
about
fingers].The reason I didn't
go short
was
rules so that
because
I knew when
the
market
caved in, they
would
create
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
I would
never
powerful.
To get back to Japan,
to have more. But
I have
a few Japanese shorts, and
I do in Japan,
whatever
I know
when
I'm
going
the crisis
comes,
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.
You may not be ableto get your
Yes, they could freezethe
of currency.
money
Suppose
side of the
out?
God knows what
they
They could
will do.
have three different
that
CBOE?
and the
of currencies
they create two levels
trade
can't meet his obligation.
on the
guy
other
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 leave the Quantum Fund?
want
didn't
to have
to do the same thing
more than
one
career.
for
the rest
of my life. I always
When I came to New York
in
wanted
1968,1
was
than I knew
a poor boy from Alabama.
By 1979,1 had made moremoney
had
started with
existed in the world. Also, we were getting
big. We
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.
left
in
I
1980.
Was
1980 the start of your
\"retirement\"?
Yes,
in 1980,1 just cashed in
my
Is that the point you
currency.
if you were short a Japanesemarket
five
options
Options Exchange. Although
I think
to be very careful about
going short
have
and
be protected
on an American exchange like the
traded
Short Japanese
311
James B. Rogers,Jr.
became
chips
an independent
tiers
The term
I really
and retired.
prefer is \"unemployed.\"
trader?
312
Well, you teach at
Columbia.
That's
I did it as a part-time
unemployed.
I couldplay
It has
so that
teaching.
I thought that,
I still think
course
here and the
Dean
kept pestering me
think people should go to business
of
people, business school was a waste
is right
\"I don't
many
one thing I wanted to learn in my retirement
a deal with the Dean to teach one
squash. So I made
He agreed.
I was\342\200\224I'm still
for
But
so.
semester
per
Columbia
gym.
for free, in return for lifetime access to the
I thought
I got a great deal, but he was smarter than
really
Oh, it's good fun,
Columbia
yes.
are
courses
And
about
My
into
October
best.
bonds
skyrocketed.
one Sunday
Nixon
night,
Japan and short
that he was taking
were
long
announced
off the gold standard.
losingheavily
on
both
sides.
Did you have to liquidate your
You can't liquidate at
a time
off the
right
positions
like that. Who can you
bat?
to in Japan?
sell
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
Did
it.
is terrific.
analysis,
trading
your
positions?
So, you really had to ride out
and the \"Bulls and Bears\"course
experiences,
stand out as
do any
Thereis no
What
was
such
thing
the analysis
a rather
as a paper loss. A
treacherous
paper
loss
paper loss.
is a very real loss.
that gave you the confidenceto
with
your
world.
America
had
to solve
our country's
stay
positions?
19 birthday
August
you stay with
Yes.
before.
Of the multitude of your
particularly dramatic?
probablythe
enjoy
you teaching?
Security analysis,investment
we talked
a very exciting time. We
teaching.
I take it, at this point, you
What
started teaching so you
You actually
dramatic experiences?
I didn't evenknow it had happened. I had
and I came in Monday
on my motorcycle,
morning
been off somewhere
That week the Japanese stock market
without having read the papers.
20 percent, and the U.S. stock market went up. We were
went
down
America
facetious?
being
was how to play
and
313
Jr.
was
1971
August
squash?
play
school.\"
worth
1983
developed into much more. But when I started out, I didn't even
I just wanted to learn how to play squash.
I'm dead serious.Columbia
to teach a course.I told him,
Lots.
in
to teach.
could
time.
thing starting
America,
it was the love of
You're not
James B.Rogers,
Any negative
squash.
I thought
want
B. Rogers, Jr.
James
present that
I talked
1982 is another. I put
throughout
1981 and 1982, and in
earlier was
part of my net
about
a gigantic
August
1982,
they
Our analysis was that
simply taken a short-term
long-termproblems.
this
was
step,
not the end of the
and it was not
going
314
B. Rogers,
James
Did that position actually turn
out
to be
OK?
Jr.
$
James B.Rogers,
But
involves
staying with a
your whole style of trading
So isn't what you are saying contradictory?
years.
actually,
trend for
It
that,
The Nixon announcement was just another step in the
out fine.
turned
of the Bretton
dissolution
among
otherthings,
and the
stabilization]
own bear market.
Woods Agreement
1944
[a
international
pact
guidelines for foreign exchangerate
decline of America.America
was
in its
rallying
established
saw it as a cosmetic move
you
So,
stayed
you
with your
that
wasn't
to change the
going
position.
kind
You
have to see the
Is
implemented
to
principle: When
you should sell the
a trend,
counteract
measures
government
rally
are
after
the
action?
government
What is the
to see
biggest
the
What
public
regarding
fallacy
a
right.
The
market
is nearly always wrong.
I
else?
make
money
but don't
examined
way until you have fully
world is always changing. Be awareof change.
situation.
the
Also,
Buy
the
never play commodities.\" You should be flexible
in
and
alert
to
anything.
If you
were counseling the average investor,
Don't do anything
market behavior?
conventional
wisdom
in the market. You have to
leam to go counter to the markets. You have to learn how to think for
yourself; to be able to see that 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
may
way,
opposite
that way for a while, but
keeping
it is very hard.
you tell
what
would
doing.
If you make 50
him?
of that.
Never, ever, follow
go the
be written
is always
market
can assureyou
by?
if you shouldn't
until
you
know what you
are
in the third
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
live
So many
to buy or sell anything.
people
change. You should be willing
\"I could never buy utilities,\"
of
kind
that
never
\"I
could
stock,\"
buy
say,
investing
down as an axiom that you always
invest against
the central banks. When the central
banks try to prop up
the
other
go
currency,
way.
and
early,
following,\"
going to go on for years. By \"trend
it just
and
it
because
selling
goes up
just
What trading rules do you
\"I could
Absolutely. It should
different.
justified\342\200\224is
change early, buy
down.
it goes
go the opposite
remember that
a general
that
is economically
balance
supply/demand
only buy markets that are
I meant buying a market
Look for hysteria
Right.
that
of trend\342\200\224atrend
That
because
trend, and
315
Jr.
50 percent
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
I don't want
invariably
to make
go?
it sound like I don'tknow
I know how to lose money better than
money\342\200\224because
how
most
time. But you
not been a major mistake in a long
I don't trade that often. It is not as though
to lose
there
has
to remember
that
people\342\200\224but
have
I'm making three decisions a
316
month. I may
make
I'll stay
them.
with
How often
there
Well,
decisions
three
a year, or five
James
B. Rogers,
Jr.
decisions
a year,
and
is a difference
I make
between making
a trade
and deciding to buy
I sell around the
trades,
do anything.
Then
I won't
until
all the pieces
Very few investors or traders areassuccessful
makes
you
I
as you
have been over
fundamentals
assessing
you
all
the
are
looking
people
can analyze
the same
until
sets
you
besides
the fact that you are very selectivethat
apart?
I have no boundaries.I am
every week. I use them
you don't
pattern
before
I look
totally
flexible.
I am open to everything,
Not what
What
know
is that
Motors.
is going
for
knowledge,
to see what
on in the world by looking
A
will
has
happened.
happen?
what has happened, you'll never
to me that there is a
what is going to happen. The charts
say
bull market.
They give me facts,but that's it. I don't say\342\200\224what
has happened. If you
don't
know
term you used earlier, reversal?\342\200\224there
what a reversal is.
is a reversal
here. I don't
know
even
reversal
and
about speculating
in
everything. I have no more compunction
Singapore dollars or shorting
Malaysian
palm oil than I do about
buying
at charts to see what
is\342\200\224
simply
I pursue
General
who
of money.
ever lookat chartsand say, \"I've seen this type of
and it usually means the market is topping.\"
But
runaway
else
time. I don't do anything
you know
you've got it right. As an example,
until
see American
you
agriculture hit a low, then no matter what
the world
is going to stop eating\342\200\224you can't
happens in the world\342\200\224unless
is now so competitive, and so
go wrong. American agriculture
many
have been washed out, that it has to go up. You
marginal farmers
just watch
American agriculture
deteriorate,
and
then
deteriorate,
deteriorate,
you
or late. In my case, usually
a little bit early. But,
buy. You may buy early
so what? The worst that happens is you bought it too early. Who cares?
Is thereanything
for
one
charts.
at and so consistentlybe correctin
variables.
Just don't do anything
at
at them
on. I learn a lot about what
is going
few
all the
services and make a lot
Yes,I look
that. But still, very
market,
technician. Excluding, of course, technicians
a rich
met
haven't
play.
I can understand
and not everything
happens
Do you use charts yourself?
don't
currencies,
bond
opinion about chart reading?
is your
What
It
different?
I don't play. I just
one scenario for
the
fit.
sell their technical
time. What
you have
when
happens
meshes?
do you make a trade?
I've owned bonds since1981,
but
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.
position.
What
the stock market, one for
in 1981.
bonds
317
James B. Rogers,Jr.
Don't
tell me. It might
and I don't want
mess
to know.
up my mind. I don't know
about
those
things,
James B. Rogers,Jr.
318
Dothe markets
behave
now because so much
differently
any
by trend-oriented
is being
managed
No. They
not
319
James B. Rogers,Jr.
money
systems?
but there
may
always have been on a computer,
always
have been systems.I guarantee
that
can
100 years in the
back
you
go
market
and not find a single decade where there hasn't been somekind
of system,
some kind of new formula developed to play the markets.
Jim
Rogers'
but
many
in its entirety,
to emulate
unique
approach may be difficult
to all traders.
of his trading
are
of
relevance
great
principles
Hisbasic
are:
concepts
1. Buy value.
If you
buy
value,
you will not lose much
even
if your
timing is wrong.
today are basicallythe sameas the
markets
So the
in the
markets
2. Wait
1970s, 1960s, and 1950s.
The
same
as the markets
periods of time. To avoid
the
in
nineteenth
go up and down. Theyhave
markets
for very long
Bottoming markets can go nowhere
in
a
dead
market, wait
up your money
tying
direction.
is a catalyst to change the market
a catalyst.
for
century.
not
changed
The same things
the rules of supply
until
make
there
and
3. Sell hysteria.
demand.
This principleis sound,
easy. Rogers'methodology
Do you have any goals at this point?
I'm
the
a wonderful
that
pastime
more and
wean
myself
First,
investing
it is hard to give up. I haven't
changed
There are two
markets.
I was twenty-two
when
I'd like to be able to
adventure.
for
looking
more from
years
old.
problems.
is such
from
I always wanted to read and 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.
Any
last words?
validated,
and arrive at the
long-term
same scenario,
Ninety
percent
investor\342\200\224or
trader,
get away
hold
eventually
is really
just common
sense. But
common
sense\342\200\224how
many
the
exact
same
of them will
to use
facts and not
focus on the
from conventional wisdomis not
astonishing
how
people can look at the exact
see what is going to happen.
thing,
but the good
something
else. The ability
same
your term\342\200\224will see
it is
very
common.
to
its application
is far from
correct
be sure
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
then
Good investing
few peoplehave
but
as follows: Wait
for
be paraphrased
is wrong, go against the
the market
you are right, and then 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
hysteria if fundamentally
Without
everything
to see whether
examine
hysteria,
can
this
the position
liquidating
necessary to
duplicate
outstay
this
type
shots. Perhaps
caution label
attached:
method
long-term
subsequent
this feat, you probably
of market or the same
picking your
to apply the
through the
at a large profit. Even if you
lack
high
have
collapse,
the steel
the financial
nerves
resources to
degree of accuracy in
this particular concept should comewith a
Warning! Any attempts by the unskilled
practitioner
herein can lead to financial ruin.
described
320
James
B. Rogers, Jr.
4. Bevery selective.
Wait for the right
trade
to come along. Never trade
for trading's sake.Have the patience to sit on your money until the high
probability
sets up exactly
trade
right.
Weinstein
Mark
5.
Be flexible.
Biases against certain markets
field of opportunity.
distinct
as
well
markets
ortypes
of trades
limit your
who says, \"I will never go short,\" has a
to the trader who is willing to go short
disadvantage
compared
as long. The trader who is open to examining
a broad range of
has
a distinct advantage over someonewho
is willing
to parA trader
High-PercentageTrader
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
7. Know
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
when
to hold
the market
and when
After
a brief
period
as a real estate
broker,
Weinstein
Mark
became a
that he virtually
threw
start in trading was so naive
withdrew
to
Weinstein
After
that
his money away.
early failure,
stake.
With the exception
the markets and earn another trading
seriously
study
trader.
full-time
His
of one disastrous
from
that
trading
Weinstein
experience,
point on. He has intensively
including
stocks,
commodities.
Although
variety of markets,
options, stock indexfutures, currencies, and
he is reluctant to divulge specific details, it is clear
Weinstein
all
these trading arenas.
a mutual friend. Although
through
his desire
for anonymity
project,
very intrigued by
reluctant to tell his story. He would call me and
the
schedule
was a successfultrader
a wide
stock
that he has profited handsomelyin
I met Mark
traded
the interview.\"
Then
the
say,
\"OK,
he
was
I will do it,
let's
made
him
day he would call and say, \"I
This pattern was repeated
publicity.\"
next
I don't want the
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
later when,
months
until about two
the matter
conversation
regarding
who
had
to
of
traders
the
caliber
agreed participatein this
impressed by
the
interview.
to
do
decided
book, Weinstein
Because
the
met me at my office one summer
Weinstein
evening.
changed
my mind.
Mark Weinstein
322
after 5:00 P.M.,we were forced
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
out
off the air-conditioning
turns
building
into a corner lobby, which,
200-pagetranscript.
Did your
Back
did
you first
get involved in trading?
in 1972, when I was a real estate
commodity broker. He and
Didyour
friend
get you
I had
I had a friend
to
school
gone
together.
interested
in
the
who
was
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
It didn't
into
realize
I didn't
had been rising
for
some
I went
long. It wasn't
even
a bad reaction. I just got
late. I didn't
in on
the
when
the move too
going. Also, my
margin to keep the position
and I didn't want
to put up any more money.
have
on
guts turned
then was that
time and was alreadyoverbought
market
enough
me,
It sounds to me like your friend let you put on a position that
out of line with
money
management
principles.
any
clearly
one of those
was
know
anything
collection
of TV
Did you
have
I knew
that
what
know
about
the markets at the time?
If I flipped through
nothing.
Absolutely
was
get-rich-quick schemes.
a
markets?
you to follow the analyst's
he also followed it. What
and
Yes,
Did you
broker,
advise
friend
broker
recommendation?
It
How
323
Mark Weinstein
a chart
book, it looked like a
test patterns to me.
any
idea of the risk involved?
the chances
I was
Didn't it occur
of my winning
were
very
slim because
I didn't
doing.
to you
that you should learn something beforeyou
started?
strategies.
computer
No, because
Do you remember
your first trade?
estate
Was
I remember
it exactly.
and I went
long
corn
I opened
based
up
a commodity
account
on a recommendationmade
grain analyst. Three days later, I was
out
$7,800.
with $8,400,
by the firm's
I was desperate for a change;
like being a real
the money that you invested a substantial part of
at the time?
It
I didn't
broker.
was
all the money
I had.
your
savings
Mark
324
did you get enough money
When
come
to
Weinstein
back into the markets?
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
me
took
week and
sold a few
approximately
as many
rented
Did you have a method
make
effort
any
to learn anything
the
about
markets
would be after two
All
the
the concept
with
learned how to chart, and became familiar
that if I
of overbought and oversold markets.I figured
gold
market,
market
and left myself enough money for
bought a severely oversold
in
drastic
two
calls, I couldn't lose unless something
happened
margin
the economy. That was my method.
if you use that approach in
But
a trending
you are going to
market,
get killed.
It worked
What
in that
were your
market.
But
a lot
It couldn't
bliss.
trading results the secondtime
I did well for severalyears
fortune.
I guess ignorancewas
of that
was
after
due
that
around?
them.
about
it
Sometimes
trading?
I was losing friends
left
with charts plastered on every
wall.
and all night.
day
apartment
So this was really
and right.
I probably
I sat in a studio
looked like a
I had left.
friends
to the
madman
endeavor.
a full-time
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
and managed to build
Did you
a small
wake
sometimes
up with
a feeling that
market was going higher or anything
like
knew
you
the gold
that?
to luck.
have all beenluck.What
were
you
doing
right when you
No, it had nothing
to do
with the direction of the
extension of what
I was
doing during the
it to sleep that
I ended
consciously that
I know now, there was very little that I was doing
seemed
I
had
I
think
just
good markets.In those days, commodities
right.
a lot better than they
do now. Very few people
to follow chart patterns
so the markets
were much
about technical analysis then,
knew
anything
as much
as I could about
more orderly.
I got a break by learning
it was working
at a time when
technical
pretty well.
analysis
relation
all day
spending
and gut reaction.
system
after two hours.
sometimes
days;
\302\253
market.
were making money?
In
risk?
controlling
in the
interim?
Yes.I studied
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
up exploring
day.
It was
market.
take so much
I would
I had
unconsciously what
just an
of
been doing
day.
to what
Did
Well,
you have any goals when you set out?
the
great
was particularly
dream until
American
true
I started
dream is to make a million
in those
vacationing
days. I never really
and traveling
dollars,
had
in Europe.
and
that
a materialistic
Mark Weinstein
Mark Weinstein
trading?
What
326
this?
was
When
It was in
the
Had you
passed
How many years after
you
started
I had been trading
for
about
mid-1970s.
the
three or four years.
dollar mark by that point?
million
start
made enough money to be able to relax,
At
that
to
I
about things wanted
point, I was feeling
and think
buy.
vacationing,
the
could
money I spent with
replace
confident enough to know that I
Yes,and
I had
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
and the idea of living
appealed
trading
327
happened?
On my next trade, I put on a large long position in soybeans.
The market
closed up the first day, and I had about a 25 percent
on
profit
my money.
I was planning
to get out of the position
at the end of the week.
The
I made was having
a specific
biggest mistake
of
I
what
wanted
out of
target
trade.
the
The target
being determined not by market analysis,but rather
the $350,000 you wanted to make on the trade.
Did you trade
because
differently
you were trying to make money for a specific
by
purpose?
it,
only
and I figured
$350,000,
it
would
take
about $50,000
a year to keep
it up.
That doesn't
sound likea lot of money
to make
I don't
to
You already
make
had the
money
to buy
the castle;
it.
didn't
take
No, I camebackand
your
decided
money out of the account to
that making
buy
the money was going
the
castle.
to be
my
goal.
In other words,your
castle.
Exactly.
market
session,
risk
and took
judgment.
went
on too large a position.I was
I was
up again the
next
not
being guided by my material
but collapsed suddenly
day,
locking limit-down.
Did you get stuckwith
next
Yes, I couldn't get
office
it
at it in terms of how much
looked
I had the money, I still
Even though
in their
have
who
$17 million
business
in
this
it cost. I know people
car.
a
new
and won't buy
trading account
Soyou
any type of rational
your
position
at limit-down?
mistake.
understand.
you didn't have
using
late in the
I came back to the U.S., I
$5 million. When
castle
almost immediately. That
the money to pay for the
was a tremendous
I didn't
desires.The
a castle.
worth
Today it is probably
wanted
for
consider the
Yes,
$350,000
in profits
was going to go for
the
would
I take
come
The next day I showedup at the
brokerage
all day to see if
opened offered limit-down. I waited
off of locked limit-down, but it didn't.
that
you
out.
the market
and
it
would
have liquidated your position if you
could
have.
If the
market
had traded,
I would have sold out
Do you remember your emotions at the
at any
time?
I was in a state of shockand
whatsoever.
office
had no
decision-making
fall asleep, and found
myself
somehow
trade the next day. On the
third
a half an hour before the opening,and
they
I couldn't
market would
about
price.
capability left
almost
praying
the
day, I called the
told me it didn't
even bother going in because
that
I
was certain
they were
in the office.
like there was any
look
face the
couldn't
situation.
down
is that?
Why
There werea few
to make
able
people
thrill out of my
getting a big
other
the kind
professional
of money
traders in the office who werenever
this situation
When
I had been making.
all those years
to
developed, they were almost relieved. It seemed justify
The
heartless.
were
did.
I
like
really
not
They
of their
taking
positions
that
was
was
and,
broker,
frankly,
was
who
my
really upset
only
person
account.
the
afraid
of
becausehe was
losing
probably
Did the other traders kid
you
it?
about
to the
office.
think they relished your predicament becauseit made
seem less deficient as traders?
Do you
How much
went
beyond
that. I think
there
others
lose
just enjoy watching
Once you stopped going into
are a lot of peoplein this
business
$ 125 thousand
salary
was
that
Before
I had nearly
10
what
percent
in my trading account. So I
$1.5 million
of my equity level prior to the trade each
I was devastated.
bleed
myself
watching
who
I felt like I was wounded in a trench
and
to death. The market
went
limit-down
five days in
and I lost over $600,000.
On
park holding hands
did you do during the
business
the
a girl
true\342\200\224maybe
fifth
state. I thought
getting
just luck that
I had
with
other
brokerage
I was too embarrassed,
and
houses, trying
own
I didn't
to get
I didn't
know
hostile
because
what
feelings about
nothing
losing
it all,
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 and
could be done. I went to a competing firm and
to think
was
Which
It
own broker
up
price quotes.
broker?
want to take the
on her
out of
was
everybody
made money all those
about
what
that
a
in a
sitting
crying
I started to think
it was
day, I remember
I had picked up, literally
in a psychotic
altogether.
was
telling me
with
the
that if I continued
years. I worried
trading, I could wind
and being forcedto go back to some job I didn't like.
Why didn't you just call your
Your
trade,
was losing nearly
relative to your account size?
loss in perspective
that
put
lap. I was practically
office,
a day. This was at a time when the average annual
was not born rich, and I couldn't stop thinking
of
day.
day?
I checked
$15,000.1
my loss in those terms.
them
money.
the
were you losing each day?
About
row,
It
again.
Could you
about it behind my back. They
They overconsoled me and then laughed
I stopped
coming
to see me come in and fall apart. That is why
wanted
329
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
I didn't
hope.
Weinstein
Mark
Weinstein
Mark
328
was
the money
and the
were:
My exact thoughts
American to go short, and
not
being
able
to get out
and the fact that
limit
situation,
Here
I am, a person who
thought
what
I found out
un-American
of a position.
was
really
I couldn't
it was
act.
unwas
Mark Weinstein
330
So
felt cheated
you
I definitely
felt
limit
with
price
not
by
being
moves.
with
from
public
work
actually
were
that
created to
supposedly
against them by
the market should be totally
of restraints.
free
did you begin trading again?
When
months, I started trading
AMEX
stocks,
I missed the leverage of the
commodity
After
a few
amazingly
slow.
think
I could
Around
There is talk about putting
limits
that
Would
reducingvolatility.
on stock
markets as a way
actually be jumping from
the
of
pan
frying
into the fire?
him
about
first
week
at his
Now,
he
the average
can at least get out
and finds out
that
at some
he can't
investor knows that if he wants to get out,
price. Imagine if this guy calls his broker
even get out
of the
In other words, you
idea of limits
are
really
saying
that
those who are expounding the
going to make matters worsefor
earlier
I never
went
trade, I realized that
short.
the
I felt it was
business
un-American. After
I was in
was
options trader.
I join
collapsed.
completely
lose?
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
of the
small
the
of
benefit
the
the height
trade,
never
me
Was he upsetthat
investors.
comment implied that, prior to the soybean
side of the markets. Is that
the
right?
traded
long
always
Yes.
I didn't
$40,000.1
he
because
during
It is absolute lunacy.It is a law that is being proposedfor
Your
and he suggestedthat
it
him. In my
office he told me to buy Teledyne
calls right before
he was sure they
were
going up. I followed his advice,
How much did you
to
sophisticated
markets.
market.
investor.
institutional
calls
the
About
are
my experiences
because
expiration
but I found
stocks.
successfully
support myself trading
that time, I ran into a friend who is a great
I told
and
Absolutely.
chart
to do
commodities.
people
preventing
getting out of their losing positions?
I think
Yes.
last?
experience
Months. I didn't want to trade commodities anymore. I
rippedevery
off my walls. I tore up
in my house that had
everything
wrong
is something
this
anything
Are you implying that price limits
protect the
there
331
How long did the emotional impact of
able to get out?
To this day, I think
cheated.
Weinstein
Mark
soybean
i
office,
he told
me that
opposite
account,
and that
the
really
lose
any money.
That
sounds
like an awfully
of capitalism,
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.
given you bad advice?
in another
trade
the
had
back to the
I came
When
you
he
It
wasn't
trust
a practical
in anyone\342\200\224even
of self-reliance
odd
type
joke. He was trying
him.
It was his way
in being
a good trader.
he
of practical
to teach
had
done the exact
was mine. So I didn't
trade
joke.
me not to place blind
of teaching
me the importance
Weinstein
Mark
332
How
did you do after that
I did
pretty well. My
333
I know you once entered an options
trading
point?
knew
friend
It
was
47
him.
originally
organized
traders
together, each
contest.Each trader
Did you trade options based onthe methodologies
Yes, combined with
technical
own
my
he
taught
you?
believe
he didn't
Hasthe fact
that
in
it. He
was a tape reader.
100
have been extraordinarily successful as a
his mind about technical analysis?
trader
changed
you
percent
technical
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
only
just about everything
certain
It
has
because
things
nothing
by two
traders
of whom
put
a $100,000
opened
on the CBOE
up $5,000
account with
floor. They got
in a winner-take-all
same
clearing
pyramiding
[using
the
firm.
How long was the contest for?
analysis.
Your friend didn't use technicalanalysis?
No,
you tell me
Can
contest.
about it?
was a phenomenal options trader. He
from
amount
and I learneda tremendous
market
the
about
everything
Weinstein
Mark
but I had learned
had I gained a lot of experience,
technical
was about
analysis, including
there
created myself. He said,\"You never give up, do you?
that way
You are trading
analysis.
to do with technical
I had
Three
months.
What
were your
results?
I turned the $100,000 into over $900,000 without
profits to increase leverage].
That's a ratherphenomenal
Yes,
performance.
but the markets were very
What did you
good
at that
time.
you went out on your own in
when
trade
any
1980?
everything. I continued to trade stockoptions.When
stock
index
trading began in the early 1980s, that became a primary
market
for me. I also traded the
In fact,
markets.
the last two
commodity
I traded
of experience.\"
futures
friend eventually
Why did you and your option trading
There
was a conflict in
our
trading
separate?
who was
trader
styles. He was a great
more
he
would
knew
he
because
loss,
in
the
ahead
out
long
come
and
way
willing to take an occasionallarge
make
than
up for it with large gains
that way. I preferred trading
I was uncomfortable trading
run.
However,
to
to eradicate
losing trades. I wasn't willing
for small profits and trying
technical,
was
purely
approach
take the same type of risk. Also, my
to
decided
in
1980,1
reader.
a
Anyway,
was
he
tape
whereas
basically
later.
go off on my own. We got together again years
during
years, my trading
Do you
remember
shifted
has
your
to nearly 90 percent commodities.
first soybean
trade after the debaclein the
1970s?
For a long time, I avoided
trading the
commodity
soybeans.
markets
eventually get back the
money
But,
as I began to find
effortlessly, I knew
I lost in soybeans.
deep
down
myself
that I would
I neverforgot
about
it.
Mark Weinstein
334
like you were looking for
sounds
It
Weinstein
Mark
it. Either you
revenge.
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
is always
didn't
the
have
exactly.
Yes,
Where did you
buy
the
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
before
caused prices
I haven't
did you get out?
I got
out
was
$10.46.]
of some at $7.25,
How much did you
Let's just say I made
The way
you
talk
make
my
about
and the rest at
on that
money
$9.92.
[The
high of the
like
that trade
had
any losing
your
worst
single trading
months.
in
Yes. Of
course,
have made a lot
cautious,
but
I could
that
month since 1980!
single
every
is the way
more
if I wasn't
money
so
I trade.
Do you remember
your worst losing week?
I
losing
I had
What was the reason?
had
haven't
any
is an
that
during
time,
but I have had some
a few
about
How can you be sure that you are
weeks when you lost money
trading?
The
reason
have
had
I am sure is that
three
losing days
trades I made during
believe anyone ever getswipedout
some other reason for
is always
in the market because of bad luck; there
weeks
statement.
incredible
not simply forgetting
J
I don't
was
You have made money
That
inexperienced.
way: What
losing days.
was a greatrelief
I realized that there was a reasonwhy
it was a total catharsis.
first
in
the
the
lost
place.
money
BecauseI was
of
trade?
you.
Yes,
type
move
back in spades.
it, it sounds
it this
put
month?
skyrocket.]
Where
let's
Well,
the 1988 drought
really keep track of that
I don't
that
infrequently
number.
beans?
Around $6.18. [Thiswas shortly
for
you did the trade, or you
a mistake involved.
off when
were
There
experience.
to
335
because
my
of my
position.
quote
that
machine
I remember
in
time,
the
last two
all my losses.
For example,I
years. Out of the
I had 17 losers,but
was down, and when
that
nine
thousands
of them
happens
of
were
I just get out
336
and a win
is somewhere in
to believe.
win ratio
your
percent\342\200\224thatis
50 percent
on
hard
really
Mark Weinstein
of their trades,
quently
would be spectacular,yet
of 75 percent
ratio
that
implying
be happy winning
would
traders
Most
Mark Weinstein
the
are
you
a variety
the
years. [Leigh Stevens is a mutual
few
past
trades during
me
who introduced
I told him about hundreds
Leigh.
of my
friend
to Weinstein.]
OK reader,I know
are saying: '\"No losing weeks,but I've had
I admit Weinstein's
some losing days.' Giveme abreak.\"Frankly,
his claims by examining
I could not verify
statements sound
preposterous.
in maintaining the
are vigorous
account statements becausehis partners
what
you
as it is a private
trading activity
partnership's
were
of his partners
a
number
In
to
the
fact,
public.
trading firm,
open
successful
in
were
and
interview
this
to
nearly
adamantly
opposed
statement
account
The only
from
Weinstein
participating.
dissuading
was
his
me
show
to
or
was
entry
able,
Weinstein
independent
willing,
which
did indeed confirm that he
in the option trading
contest,
with 100 percent
months
a $ 100,000 account ninefold in three
multiplied
of the
confidentiality
not
winning
Wave
an
I spoke to Leigh, who has known Weinstein
unsatisfied,
him trade. I have known
has
Leigh
and
watching
days
many
spent
years
him as honest, low-keyed,
describe
for three years and can confidently
of about 100 of Weinstein's
that
and levelheaded.Leigh confirmed
tradeshe had
personally
told him about
on the
this literally,
percentage
one that
witnessed
and several hundred
phone (right after he put
was a loser.
Even
rate
is somewhat
lower than
his win/lossratio is incredibly high.
own
How can he do it? Weinstein's
but to put
of faulty
memory
it in
perspective,
helpful. Weinstein
employs
monitor
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
are at leastmarginally
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
spread.
comments
but that belies their
page,
description.
When
like boasting on the written
be a much closer
would
sound
may
tone\342\200\224naivete
talks about trades, his commentsare
Weinstein
peppered
is going lower,\" \"This
phrases such as, \"It's obviousthe market
is so easy.\" It is clear he has no
conception of how difficult
trading
the
with
market
is for
of us.
rest
I still believe
implies,
How do you explain your
time?
Because I have
traders
are the
own custom-designed state-of-the-art
technical indicators designed to
constantly
Rather than use the standard
momentum.
markets
has forced
response
further
to this
query
elaboration
his
uses
and he feels the
a trade.
on
put
follows,
some
Finally, add to this one
sense of market timing.
when
Only
uncanny
would be
I thought
computersystems
in market
measure changes
values for these indicators,Weinstein
to
he
incorporating
retracements,
last essential
(I mean
not as a euphemism for dishonesty), Weinstein'sactual
winning
analysis
Fibonacci
cycles,
on), he could
them
if because
Weinstein
more
chart
analysis.
up right
Weinstein's
Still
remember
only
of methodologies,including
everything lines
trades.
for
with comprehensive
analysis
and Elliott
ingredient:
You can checkwith
market conditions. Hecombinesthis
for changing
adjusts
intensive real-time
of 99
vicinity
337
his own
values,
which
he
fre-
am
trading
of market
combination
of
a real
ones
properly,
conditions
experience
ability
to win
such a high
percentage
of the
fear of the
who
markets.
I have found that the greatest
are most afraid of the markets.
My fear of the
me to hone my timing
it is like a pool player
is not
with
running
right, I don't trade.
and my nervous
great precision. When I
racks. If my gut feel
My
timing
system. If my
nervous
is a
system
tells
Mark Weinstein
338
out of the position, it is because the market action triggers
and experience that I have seen before.
in my 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
to get
trading.
of professional
epitome
gets at one time, but that is why a pigeon is a pigeon.You will
I day
it is just too fast. That is the way
never be able to shoot a sparrow,
am
sure that
trade. For example,there are times during the day when I
and I am out
is going up, but I don't try to pick the bottom,
the S&P
where the momentum is greatest.
it tops. I just take the mid-range
before
eats.
like a sparrow
That, to me, is trading
a pigeon
Am I paraphrasingyou
positiontrading
The
common
and
is that
to know when
How do you
correctly?
the
denominator
The
cheetah
is your analogy for
is your analogy for day trading.
is that both animals wait for can't-Iose
sparrow
circumstances.
How do you
pick
your
trades?
do
works all the
You have
time.
that?
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
Is
there
feel.
I am
to put
you can single out
on a trade?
looking
for a market that
anything
deciding
always
the other
say
they
as
the
is losing
most important
momentum,
behave
the
stock
and commodity
and then
go
markets, would you
differently?
Absolutely. In contrast to the commodity markets, the
to enjoy a meaningful
rarely gives you the opportunity
Why
element
way.
Having traded both
stock
market
very
trend.
is that?
Because when
one price level,
institutions
scale
specialists sell out,
out as the market
goes
and
they
don't
sell out at
they
up. Similarly, when
they scale in as the market goes down. This leads to choppier
price action and is the reason
why many good commodity traders that
know lose every time they
go into the stock market.
buy,
But you win
doing
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
technical approach
each method.
single
them
they
Exactly.
no
to use
It is experience and gut
I often
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 at home,
Weinstein
Mark
consistently
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 the market
down not only on profit taking, but on a lot of loss taking
as well.
are the trading
What
Is your
method
market
than
analysis therefore
of technical
in
the
different in the
individual
I look
stocks; they all have uieir own personalities. For
before
a major
Motors
will usually rally
example, IBM and General
a major market top. As another
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
before
because
well trading the indexes,
become a very experienced trader of
extremely
stocks
and
What
I had
is the
public's
biggest misconception
is not
going
direction because ofa newsitem\342\200\224even a dramatic
is the way the media
saying
it would be wonderful
place
that the market
if everybody
truth is, most people losemoney,
because
they take meir losses. I know
wonder
under
the category
reports me reasonsfor
why the hell they
lost
me
market
of misconceptions
being down. They
is down because of profit
taking.
I think
was always taking
But, the
profits.
and the reason markets go down is
educated
people who watch the news
money
when everyone
else is taking
the most
limitations.
own
person.
Don't trade until
out of the
6. Your
get
arrogant,
you forsake risk control.
humble.
has limitations\342\200\224even
Everyone
the
best
Think against the
an opportunity
herd,
presents
as they
must lose in time.
itself. Knowing
when
to stay
as knowing
when
to be in them.
has to be flexible enough to changewhen
the
The mistake most people make is they
the same
keep
is as important
markets
strategy
I thought
time.
didn't
behave the
They say, \"Damn, the market
it would.\" Why
it?
should
Life and the markets
just
don't
work that
way.
Don't
get too complacentonce you
way
thing
who trade
Another item I would
and
5.
about the
one.
are always
4. Be your
7.
to reverse
by?
traders.
strategy all the
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
3. Understand your
options.
markets?
That
are
environmentchanges.
do you think
live
homework.
be arrogant. When you
Don't
The besttraders
at the
stocks. I have
do your
1. Always
2.
I ever traded index futures,
rules you
goes
stock
markets?
commodity
341
in the
world is holding
on
profits. The toughest
That is becauseonce you
a second goal that is usually
the
have
made
to profits.
attained
a goal, you then set
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
have
self-destructprocessin which
Any
final
advice
you have
they
wind up losing.
for the beginning trader?
how to lose; it is more important than learning how to
when
you are always going to be a winner,
you lose,
will
of
and
end
the market
you
feelings
develop
hostility
up blaming
instead
of trying
to leam why you lost.
Limit losses quickly. To paraphrase
from
Reminiscences
of a Stock
most
traders
hold
on
to
their
losses
too
Operator,
long because they hope
the loss will not get larger.They
take profits
too soon, because they fear
the profit will diminish. Instead, traders should feara larger
loss and hope
for a largerprofit.
You
have
win. If you
to leam
think
Mark
342
Weinstein's
most traumatic
material
goal
interfere
surfaced
in other interviews. It invariably
translate the
profit or loss of a trade
trades
potential
The cornerstone of Weinstein's
in which everything
appears
odds of winning
expect
trading
seems
into
about
is sound
material
terms.
is to wait
trading
approach
to be lined up exactly
right,
for
those
and the
overwhelming.
advice that
for only those trades onefeels most
in this
is echoed
by a number of traders
book.
Although viewing markets as nonrandom
long believed that
price
movements)
run, I have
(i.e., intraday
were largely random. Weinsteinhas shaken this belief.
very
short-term
market
Part
is a common
Even though most ofus can never
to remotely approach Weinstein's confidence
in the trades he
seem
selects, the conceptof waiting
confident
This
when he let a
theme that has
to be a mistake to
occurred
experience
with his trading.
Weinstein
over
the long
fluctuations
The
View
from
the
Floor
W
Gelber
Brian
Broker
Brian Gelber began his career asa broker,
firm's financial futures
Trade. After
for
advising
successfully
account. In the
the dual distinction
his own
enjoyed
brokers
prominent
In January
managing
on the floor of the
operations
of being
accounts.
Board
of
trading,
Gelber
(if not the most)
local traders.
the direct
to his own trading,
and futures in government
a group of traders in both cash
and othermarkets. He is the presidentof
Gelber Group,GelberManagement,
companies
brokerage
Chicago
In addition
Gelber supervises
involved
are
a major
floor and one of the largest
Gelber
to include
1986,
expandedhis trading
on the
management of customer
securities
Trader
clients, he begantrading
institutional
days of T-bond futures
one of the most
early
Turned
and
in clearing,
Gelber
brokerage,
and
a group
Securities.
money
of companies:
These
management.
relaxed personality seemed almost
out of place with his
the
level
of someone
Instead
of
of
high
intensity
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
Gelber's
a pleasant
not
vacation.
our meeting took place during
Although
to be overly concerned with
seem
the bond
relaxed,
despite
leaving
the trading
conduct our
interview.
\"I'll
probably
quite
trading
market.
hours, Gelber did
In fact, he seemed
desk
for his private office to
do better by staying
he
here,\"
346
Brian Gelber
remarked, obviously
what
reflecting
at the
market
low-opportunity
he perceived to be a
read
the bold headline
the week
describing Saliba's experienceduring
of the October 19,1987,stockmarket
crash:
He Made $4
\"Victory!
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
Million
347
Brian Gelber
Hours.\" Jokingly,
Gelber asked, \"I made
$4
on that day; how come I'm not on a magazine
to be boastful.It did,however,
very
a basic truth about great traders: Many,
if not most,
low profiles and are thereforevirtually
unknown
to the
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
I openedwould
be
mine.
But you knew virtually
at all
nothing
about markets at that
time.
minutes
not meant
public.
I had
read a couple of books,and I knew something
I worked for.
for the first fellow
about charts\342\200\224having
them
kept
What books did you
read?
There
weren't
too many around at that
time.
How did you
The book
get
in this industry?
started
by Robert
Street,
from college
graduating
In Salt Lake City, I answered
After
in 1976,1 backpacked around
an
ad for a commodity
have
any idea what it was, but I figured it was
stockbroker. I got my license
while working for a guy
a boiler room operation.
basically
running
didn't
You really started out
the
wrong
country.
something
was
like a
who
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.
When
I walked
stock
office.
to give him
on
the
broker position.I
a real fly-by-night
I learned the most from was Technical Analysis of Stock Trends
and John Magee (John Magee, Inc., 109State
D. Edwards
Boston,
MA).
What other 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.
I kept
keeping his charts for him, while
registered.
getting
to myself,
\"This guy is pretty
much
of a crook.\" I got my license
saying
and quit. Then I bummed around for another
few months,
just working
I was
temporary jobs to pay
the rent.
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
It was magnetic; I felt
me want
made
that
I could
make money there, but
to learn more about it.
I kept
Gelber
and
losing,
349
Gelber
Brian
Who were those trades for?
Just accounts
It soundslike you
had
Yes,becauseI had
failed.
a minor
to pursue it.
compulsion
understand
I had
opened
they
could
that
who
really didn't
by cold calling\342\200\224people
were
lost, they
always
lose, and when
they
upset.
me
taught
banker
a few things, and
account
Did you
desk
the traders at the Ginnie Mae
Anyway,
I went out and opened almost
every
mortgage
giving
the
understand
Ginnie
Mae market at that
How then did you
Pretty
much.
Using
chart
time?
understand
anything
about
it.
I snowballedthem
asked
they
were
people
at first,
but I listened and
I learned
Initially, I was confused by what they were doing, and
confused by what
I was trying to sell them.
equally
futures as an
got
customers lose becausethe researchwas
pretty
lost because their time
was longer term.
research
No. They
the
all
pure
hedging
in commissions.
Was this all in the
my first
few
good at it.
and their
brokers
that is a basic problembetweenmost
to
information
market
to
It
is
almost
your
customers.
impossible get
for the customer to acton it.
customer
enough
quickly
What
At
that
commodity
point,
markets
accounts. By May 1977,1
was making $2,000 a
That was a tremendousamount
of money
for me.
Ginnie
was mostly day to day, while
I think
Exactly.
through
market
Yes,
horizon
wrong?
So there was a mismatch?
instrument.
Were these hedging accounts?
month
brokers
Newer
from the questions
me.
meetings. ThenI really
McKinnon analysts,
definitely tend to rely on
of Thomson
research
on yourself?
And with that limited knowledge,I bumbled
Right.
analysis?
research.
firm's
their
sell
you understood
least
At
suggestions?
trading
Believe it or not, more off the
and secondarily off my charts.
Did your
they
them
in Salt Lake.
I first started opening accounts,I didn't
When
Were you
Mae market?
yes. Previously, I had donesomebrokeragein
such as wheat, hogs, and pork bellies.
other
beat
the
is that even if a broker can actually
that
to the customer.
he
translate
can't
short
term,
trading
you
are
saying
Insurmountable
odds, becauseyou
trigger, and the
information
So, one of
the
points
trade with
a longer-term
Yes, you have to.
have
changes
two people
who have to pull the
so quickly.
of advice you would give to speculatorsis to
perspective?
350
Gelber
Brian
talk about floor trading.I know,
at one point, you were both a
and trader
in the T-bond futures market.The question
I think
a lot of people would
ask
is: If you receive a large customer
Let's
floor
351
Gelber
Brian
But you were.
broker
sellorderat the
you're
thinking
how do you handle it?
long position,
I never
time
same
of closing out
own
your
was
a wild
same
market.
It
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,
against
ways.
one.
all your customer orders were going one
way
against
your
own position? Did you ever end up trapped
in a position because you
had to execute all the customer orders first?
did a good job, but
it probably
traders
most of the significant size
there is no doubt
the
on
life.
floor
or
just traders,
customers?
all are either brokersor traders
They
Is that
about half a dozen times, and it probably
cost
me a grand total
of a half million dollars over a number
of years. But
measured against the amount
of money I was making, it didn't
kill me.
took years off my
about
now.
That
is the only
to go;
way
it.
true of most floors, or just the
T-bond
floor?
to me
happened
That was the costof
doing
business?
the T-bond floor.In the S&P and in the New York markets,
some of the big brokers are also big traders.
Primarily,
Given
today's
of dual
confidence
Right.
own
It must be a gut-wrenching
get out, but not
the
when
exhausted
and do it again. This
just get up the next day
it was a great experience, I really
three years, and while
shouldn't have done it. You can't be a great brokerand a great trader. I
do somealsohandle
But what if some important newswas
breaking,and
Yes,that
and was totally
hours
for
on
Are
OK,that'san easy
and the biggest broker in
trader
biggest
long
I went home. Then I would
went
order movethe market
Besides, I had so many
time. I was the
I worked very
being
able
situation
though,
knowing
you want
to act because of a conflict
with
customer
to
It
account]
are people who violate the
orders and tradingone's
customer
trading [handling
to
likely
get caught?
increased
scrutiny,
very difficult to create a flawlessaudit
is still
trail
in an open
outcry
market.
orders.
Usually, you
acting as a broker and thinking,
to sell 1,000lots; how can I do it best?\" Then, when you
the order, you might say to yourself, \"Oh damn, I'm still
are
get out
of
too busy
I have
with
long; I have to
this thing.\"
Is there a built-in
disadvantage
customerorders?
Absolutely.
\"OK,
are done
As
a trader; if you
I tell
for
a floor
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
bonds
explain
his
way
He could give
the people I hire, \"If
are a trader,
you
out of that
one?
trader who also handles
are a broker,
you are not a broker.\"
you are not
his
order
he could fill both orders
order. There are always
crooks
or his customers' orders to
another
and put another broker's number
to get around extra scrutiny.
ways
will always be difficult
to catch.
broker.
Or
his
own
on
The
smart
352
Brian Gelber
Is the temptation
dual
in
too great?
trading
It's odd you say that, because you
No. After
been
having
say that dual trading is good
but it is too heavy a burden for the
marketplace,
rules
the
Should
be changed to disallowdual
is a difficult question. What
integrity of the
or the
that dual trading
adds
probably more important
may
would still
is more
individual?
tremendous
than
liquidity
to the
the fact that a small
a way
to steal. That is their
were
perception
system,
and
that is
banned,
the stealers
of how
did you start trading for
you
the
T-bond
your
own
account
on the floor?
1979
my personality.
get into trading?
know
the
some of my customers said, \"You
because
trading
six
I
at
but
after
resisted
trade?\"
don't
so
market
first,
well, why
you just
there
it
evolved.
I
From
started
months of holding
just
out,
trading.
Do you remember
your first
trades?
$50,000 more.SinceI was
as a broker,
about $50,000 per month
making
I
But
didn't like
even
month.
I
that
broke
was
attitude
that
basically
my
and
a
started
I
size
down
cut
the
at
all.
So,
trading
my
position
feeling
the bear market of 1979. The
little more actively. This happenedduring
problemwas that I was bullish all the way down.
Why were you bullish?
customers
example,I was
you
could
out as a customer's man,
just the opposite. I had started
1981,1 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 be an unrewarding,
unglamorous game.
it was
and from
you
higher echelon. I
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.
market?
to give up your floor brokerage so that
on trading?
Actually,
did
an even
I started
My
tempted
good
at
My first
In 1979.
concentrate
at it, and it suited
to make
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
far more successful than
percentage of dual
business.
did you first get involved in
When
important, the efficiency of the
There is no doubt
in my mind
is that as a broker I was
point
my
guess
So, why
trading?
cheat. Besides, even if dual trading
find
money in this
Were
I
was really
traders
been
it, I would
through
individual.
market
have
most traders.
for efficiencyin the
That
353
Gelber
Brian
kept
go much higher.* For
telling me that rates couldn't
the orders for CitiBank and Citicorpand they
handling
buying all the way down. These were renowned people saying
an opinion and backing it up with deeds.
had
they
were
that
through
*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 then,
of various institutions.
I was
told
What
So, you don't
pay much attention
to
those
of opinions
types
anymore?
I listen
them
to
I don't read the
in passing.
portfolio managers anymore.
it does much for any
trader.
did much
never
It
words, the problem wasn'tthe fact
In other
to other people, but that
how
know
you
were
to decide which
of
The 1979experience
losing
opinion\342\200\224a sound
market
You
really
based
money
opinion
by intelligent
successes
coming
people
that
on someone
was
just
else's
absolutely
to the wrong people.
the right
should
or wrong
is buying
people.
I was
a lot of stuff;
when
Could
you have done it without
I would
hope
As
You
were
commercial
them;
accounts?
that it wasn't
a self-
did
that streak
From
over
Then
time,
to saying,
opposed
I started to get a grip on how to make
have
an opinion and I want
to express
\"I
it in the market,\" I started asking, \"How
do I make
money out
a trading
of all
learned that an opinion isn't worth that
listen
to the market. I became a reactive
of being
until
bull
1986,
market
although
in bonds.
able to read the tape?
this?\"
much.
trader
It is more
important
as opposed
to an
opinionated trader.
customers
they were bearish on bonds from
I never had a losingyear
during the mid-stages of the
1985
I was
attentive
and had good instincts.
point?
I had
of my
standpoint,
in
Was your trading successa matter
Yes.
What had you learned by that
end?
just
hip.
In 1980,one
the
But if it was, fine. I don't know.
prophecy.
fulfilling
days.
losing
I could have done it without
that
I did struggle
right.
had any
I hardly
months
go up.\"
had no strategy, no plan, no system.
the
shootingfrom
from?
I learned how to read the tape and developed good instincts. We were
and
in bonds back then\342\200\224we, meaning
such
my customers
big players
we picked to trade could virtually
stop the market.
myself\342\200\224that the spots
It
some of the support and resistance
We were actually
points.
creating
there
was a streak of
didn't take that much to do it back then. I think
When
to
all
wrong.
you were listening
that
listening
were
of
interviews
Barron's
for me, and I don'tthink
a naive kid saying, \"Here is a major accountthat
the
money.
money
not to listen to your customersthen?
you
Where were your
That's
away
then.
back
I didn't
would have thrown
in 1979,1
done
Citi-
take
Let's
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
that
355
Gelber
customers as I had
over again.
in the same situation?
today
the characteristics
I know
Now,
do
Brian
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 born to be a good
be true.
My feeling is that
you
don't
Brian Getber
356
Is it a matter
Your
Yes.
of having
a sixth senseabout the market?
often tells you what
gut
who don't have the
Are people
their time? Or can almost
Beingon the floor sounds like a very intense thing
in, day out. Doesit physically
you down?
grind
to do.
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
work in
I'll
like a cliche.What
sounds
That
do
give you an example. I think
working for me who
is better.
you
mean
by \"know
yourself\"?
is a guy
I'm
a good trader, but there
I could go out there and beat my head
and try to outdo him, or I can just be myself. Let him
he
make whatever can, and I'll make whatever I can.
This is my view of a year in the life of a trader:Four out of twelve
months you are hot. You are so excited that you can't sleep at night. You
can't wait to get to work the next day; you're just rolling. Two months
are so cold, you are miserable.You
out of the year, you are cold. You
can't
at night. You can't figure
six months
other
sleep
to come from. The
make and lose. You
you
are
can't
out
year,
you
thinking
you never sleep, becauseyou
It is an all-consuming
too much about trading.
why you
need to know
The net
when
just around
after
end
the
the
opposite
up jumping
because
I know
happen
there.
yourself\342\200\224to
a big success,
don't,
might
is that
result
then
earth. Or,
out how
to make money.
going
in
make and lose,
to figure
harder to maintain
corner,
moderate
your
thing.
emotions.
That
is
If you
high as a kite. You are not prepared
the market suddenly brings you
to
back
you
are
situation, when you
out of a window. Why
myself. I need to
interact
are
did
with
matter
how
good
That's
right.
It's exactly
Out
of every
Howmany
like that.
end
will
up losing
half.
least
attribute
The reason I have
so consistent
been
the
market
has been
and that
If it is in line
the
market
and
is that
I'm
a great
truly
to tell you
listen to what
major
locals
their
opinion.
they
say and
calls me up
three
has rallied, and he is asking me what
selling and is not sure of his position.
tell
with
will
want
only
they
For example, if one of the
he
What
traders.
do you
listener. I
twenty-five traders each day. Mosttraders
to about
probably talk
most
to?
success
your
when
how
everything they came in with?
You have been more successfulthan
that
age and no
to a certain
get
were\342\200\224
100 people who go to the floor to become traders,
at least a million dollars within
five years?
What does that
doesn't
you
five or less.
Maybe
At
performance.
make
will
consistently
losing, you
I leave the floor? Again,
people
your
like professional sports.You
It sounds
because I honestly
constantly
your
to push
to your opinion;
are
older fellows. When you are in
day
mental
the next trade is going
you are trying
because
sleep,
where
out of the
in the
be doing
to
and thirties, you can rebound
pretty well from the physicaland
rebound
stress. As you get older, you don't
as well, and you have
twenties
many
desk
the
against
Absolutely. You can seethat
market.
the
357
Brian Gelber
don't
listen
I am different
how they
say
days
in a row
I think,
I know
it.
you?
what the other traders I talk
probably
go higher.
to
are doing,
it tells me
358
Brian Gelber
Getber
Brian
are nervous
of them
So if you talk to twenty-five people, and twenty
are short,
about the market going higher becauseimplicitly
they
side?
on
the
that
should
be
tell
does that
long
trading
you
you
By \"trying
is right,
and I'll go with
the
but
Sometimes,
I've
to read people very
been
well,
even
though no one thinks
been
Right,
You
can't
I listen.
For example,
now.
All
I have to do is
to be
short. I knew that
I
say to a trader,
Is reading
fine.
When
\"You're cold, you
the guy is cold, he iscold.
can't
trade.\"
You have to
course.
their
other traders a key componentof your
personal
I felt that the industry had developed to the point where my
brokerage
skills wereno longer needed. All anyone wanted to know was: \"Where's
the
next
tick?\" \"How can I move size?\"
The price to be paid for
my
skills
was
to talk
to people
I know
very
realization
that when
don't
you
do well.
terms
of customer
trading.
The
business?
market
had gotten
so voluminous
It got to the point where
that my style of swing
trading
was just trying
the next tick instead of the
to read
was
worthless.
volume
was
too big; capitalization was too
market from
the
floor.
The
Because
don't
in
next
I
8 ticks.
big.
I couldn't
read the
well.
other things are important to your trading
too hard, you
too low.
Customerbusinessand
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.
The
so
Why couldn't you play the same game?
to read them.
how
I know
these people, so I understand
Yes, I'm pliable.
I don't want to hear what Jack Schwager says,becauseI don't know him.
What
were
trading
right now?
I only want
off the floor, sinceyou
for coming
motivation
is cold?
the one time he gets hot,
let them run
low?
there?
You are talking
and
fairly
I've
successful
able
particular
long
there, you just lay
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
better as
and
people
doing this since 1976.I've always
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
a lot of money away.
thrown
having
aren't
opportunities
What was the
As
not
and ten are bearish?
bullish
are
fifteen
when you talk to twenty-five
confusing
get
reasons
I'm sitting in here with you for so long
The markets haven't tradedwell in weeks,
and we
are proud of ourselvesfor
Sowhen
is no trade?
Don't
I'm
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.
it
the
there
it.
Sometimes,
Doesn't
do you mean pressing when
hard,\"
hours.
trading
during
opinion
too
Pressing is one of
and
that is a big
in the industry
of people
Yes. I know a large number
plus. I listen to them. I go with the people who are hot. Sure, I can form
I do in the
my own opinion, but that is not what makes me do the things
market. Sometimes,Iknow my
359
care, you do well, and
when
you try
Brian Gelber
360
Did your performance start decreasing;did
Is that
see the
wall?
the
on
handwriting
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
was
the risk/reward
and
I was taking on tremendous positions
that
a
make
to
I had
change.
was when I became convincedthat
That
insane.
Were you just
period on any
all I was doing
here
trading, and
was
hard
pretty
The point
too.
you didn't
really
hard
is that
a couple
in place.
running
of times, but I had some good
I found that
harder and harder,
I don't like to work
and physically
I was just mentally
as
in previous
hard
at
No, we are
volatility
pit is a very
stimulating
to force
yourself to be
motivated
environment.
each
system
interesting
would you have
Off the
floor, you
and
we have
to volatility. Our belief is that
we've found through
Although
related
quirks
offers
clues to trend
direction.
that
this system
gives you
For an automated,
good
we do not
signals,
blindly
would you consider
what
system,
computerized
good resultsin terms
annual return?
of average
to 50 percent,
40
maximum
with
equity
drawdowns
under 10
percent.
But
The
tools. One particularly
the trades.
About
years,
We only use technicalindicators
traders.\"
\"discretionary
as trading
myself.
exhausting
real
trade
following.
use trading systems?
backtesting
stayed in the pit?
Yes.
Do you
systems
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
follow
as I worked
had been doing as well
If you
get hit
true?
still
developed is based on
trade?
particular
I did get hit
Actually,
winners
that
lucky
361
Brian Gelber
have larger maximum
will always
systems
than
drawdowns
that.
have
That is why
difficult
day. That was a very
we
haven't
directly
traded money on them.
transition.
Is
it harder
Not
in the
Do you
to trade off the floor?
long run. My profitability
in
1987
any
system
I haven't seenone yet,
and 1988 has been pretty
good.
can compete with
although
Therearesometraderswho
difficult.
very
that your first year off the
the market
trade
to
still
were
trying
that
you
Was the main problem
as you did on the floor?
You
think
floor
mentioned
Yes, that
was
the number
transition occurred during
my style
to lose because
was
that
was
one reason. The secondreason
bull market. I was bound
the 1986 runaway
trends.
on
based
following
was not
the
What
is it
that keeps
Most
traders
who
their
are
career
can't
too worried
have
trader?
may be one somewhere.
the
skills, but who don't
succeed.
them from becomingsuccessful?
fail have
wrong. Even thosewho
there
a good
are
large egos and
willing
admit it later
about losing.
on. Also,
admit
can't
to admit that
they
that they
are wrong
are
early in
some traders fail becausethey
362
Gelber
Brian
In other
losses, but
words, successful trading isa matter
not being afraid of them.
is a good way to put it. I'm not afraid to lose. When
afraid to lose, you're finished.
to accept lossesa characteristicof
ability
It sounds
on treating
That
Is the
to avoid
of trying
Gelber
Brian
you
start
being
trader?
a winning
the market; he
Yes. Tom Baldwin is a good example.He only trades
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.
trade
particular
that stands
like part of your
each
What did you
the
long
bond was being corneredby
the
Japanese,
92.00.
I was
from
limit
bid. I had never lost so much
because
I did
things
$1 million,
differently
and the
than
market
only a few ticks away
so fast, and it was
was
money,
cornered
when you said the Japanese
earlier
mean
the Japanese
share. This was the
to
want
first
buy securities\342\200\224they
time
their big thing
is market
buy something,
the U.S. got a good feel of how the Japanese
them
all.
drove
us to the
buy
highs
in
That's
gradually
at first
trade
So,
the Japanese
apparently,
low for all the
I
don't
think
risk
they
implied
that big early in
the
the
market?
would
buy,
prices
weren't as fazed by
the
yield
in a long bond position.
being
so
look at it in terms
of yield. Rather, they view things as
if they are, they buy. Every time
they
would go up, and they would
buy some more.
whether prices are going
up,
their positionin time?
and then play with
bond
the
right.
and
The bond market has collapsedagainsincethen;
don't
the
do.
I normally
What specifically?
I usually
is based
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
philosophy
market?
Was this the move that
In 1986,when
money-management
independently.
year
I sold a little bit more
Right. Anyway,
up at the highs, and from that
point
concerned
on, I was only
with covering.
I waited patiently,
and
the
market started coming back down. I ended
up losing
only $400,000 for
the
not all that bad considering where I was earlier.
day,
But that trade
had a big emotional impact on me.I was flabbergasted
the
market
by
I had forgotten
action.
that markets could run away like that. I couldn't
believehow wrong I had been.
When
In your trading experience,is thereone
out as the most dramatic?
363
year.
money
I like to make money
I have made.
Sure.
who
Do you know who bought
desperately
needed
did
they
get out of
the most at the highs? The U.S.dealers
to cover becausethey had sold on the way up.
Brian Gelber
364
Are the Japanese smarttraders then?
No,
they
and
they
just have a style. They are cannonball
of mine
all go together. A friend
traders.
They
at one of the
go one way,
I was
shops
Japanese
is the basis [the price spreadbetweencash T-bonds and T-bond
cash
trader had noticed that
futures]
going out?\" Naively, the Japanese
friend
much.
while futures didn't go up very
My
prices had gone way up,
Of course, the
bond available.
every
told him, \"Well, you just bought
their
trading.
to go out.\"
The Japanese
1987 as they
did
They
the impact of
really understand
didn't
in
market
did much the same thing in the U.S. equity
of it,
control
in bonds in 1986. They practicallytook
higher.
buying because prices kept going
stocks and selling bonds in
F11 never forgive myself for not buying
in 1987.
trade
one
That was going to be my number
1987.
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?
Also,
we
knew
the Japanese
U.S. stocks. Having
already
capitalization
the trade was even more obvious.
the bond market,
were buying
learned
Then
why
didn't
between
spread
$19,000
between
the
high-
T-bond
contract
is the
What
a few
basis.
days, Japanese buying
to $30,000.
key trading rule you
had
live
by?
Never add to a loser.
the
does
What
He overtrades
and
How do you
handle
I instinctively
to
wipe
trader
average
do wrong?
for tips.
begs
a losing
streak?
trade
smaller
and sometimes
the slate clean and start fresh.
I just take a break.Itisa good
bad, but still have somegoodpositions
them
as
well?
you liquidate
When
you are going
Absolutely.
They
are bound
I found
the
T-bond
market
I went
in
subjects
to turn
Gelber.
Brian
art
the
Henoted
against
for short-term trading.
trading
even
and
the most interesting
you
on,
do
too.
the Japanese
portions
These subjects, however, did not
of trading.
a tendency
losses,
of dual trading
among
caveats providedby
was trading
on a one-to-one contractvalue
on a four-day vacation, and in just
stock market had pushed the spread
you
trigger.
with
the S&P and the
since
their buying style in
you do it?
and $25,000
before the vacation,
for the spread to break out above
its trading range. I wanted
it above $26,000. At a $30,000
I
spread,
just couldn'tpull the
into the
The
buy the spread
you
waiting
to buy
habit
That's right.
365
the idea?
\"Why
is going
didn't
Why
about every long bond
just
told me about a Japanese trader who bought
back and asked,
he
called
later
minutes
fifteen
About
on the screen.
basis
Brian Gelber
On a more practical note,
impact on the U.S.
conversation
of my
provide
one
any insights
of the primary
concerned
the misuse of brokerageresearch.
for the broker and clientto use longer-term
research
Gelber
This
of information often leads to
misapplication
when the research is right.
Brian
366
Clearly,
Gelber's
flexibility
and
suppression
of ego
Gelber
are key elements of
to hot traders, he notes, \"I'llgo with their
I
is whether
All that matters
It doesn't matter if I'm right.
success.
Referring
opinion....
make money.\"
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 their
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.
To the
lungs.
bedlam
institutionalized
uninitiated,
it
seems
functions
actually
is the single largest individual
By most accounts,Tom Baldwin
in
trader
the T-bond pit. His trading
size puts him in the same leagueas
the
institutional
primary
players. 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
trading T-bonds
T-bonds). Baldwin is in his early
a scant six years ago.
Baldwin'sentry
recipe for failure
than
into
the world
success.
thirties,
of floor trading
In 1982, with
no prior
having begun
sounds
more
like a
trading experience,
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
As if this
were
not enough,
another
$1,000 per month
his wife was pregnant
for
at the
living
time.
expenses.
TomBaldwin
368
is not one to play it safe. His aggressive riska
of his success. He turned
elements
is one of
key
taking
posture
was
his
first
before
millionaire
He wasa
year
profit from the beginning.
to discuss the
he declines
back.
looked
never
has
and
Although
up
$30 million appearsto be a conservative estimate.
extent of his winnings,
Baldwin
Obviously,
the
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
had
done some interviews
to do
reluctant
obviously grown
generous intervention\342\200\224the
any
more.
in
the
past,
Brian
Without
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 asking
conduct
the
interview
the next
completely
impromptu,
shooting
off
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
would
fly
off.
of an
not be able to think
that, at some point, I would
into the
This happened about forty minutes
immediate
question.
follow-up
a
for
index
at
down
cards,
searching
I
interview.
my
quickly
glanced
touched
I
had
on
a
focused
already
lead. Unfortunately,
question
my eyes
a different perspective, it was too
I tried to ask it from
upon, and though
I knew
Tom Baldwin
late. The game
himself.
Howdid
you
369
over. Baldwin
said he had
get interested
in
was
first
to get
going and excused
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
to trade?
learn
One lot at a time. I always had an opinion. All day long I stood there and
developed an opinion.As I came to see that my opinion was right, I was
if I didn't make the trade.
even
reinforced,
Then when I traded, I knew
from
there six hours a day, every day, that most of the time I
standing
was right. I would see the same scenariosdevelop
over
and over again.
Are you talking
market
about
patterns
or traders
doing certain
things?
Both. Market
players
would
patterns
would
over and over again, or market
again, and you just trade
occur
do the same thing
and over
over
it.
What were your first
few
months
like? Were you profitable
initially?
I think
the most I was ever
out profitably.
down
was
19 ticks, so I pretty
much
started
370
Tom
what was it that
to the pits with
no background,
on
market?
the
of
an
to
be
edge
right
enough
you
gave
Coming
TomBaldwin
Baldwin
there
But you
any experience
need
don't
You
smarter
it. You
are
To get as much
out
of
a feel
On
to do it. The
more you know, the worse it
at all
education
The
you
of
taken full
it. I've
get
You just never know. You have to
out
it, and if you are in the
right
position,
though, your trades will
average,
Yes. I probably
average
put
on a
or just
1 tick
you
scalping\342\200\224when
holding
I try to make
it short.
Are we talking
about
4-tick
profits
time
net
out
points
the market,
watch
just go
with
10 percent.
still using the same basic trading style yon
technical
input?
Yes. I use charts.
get
Do you
use
No.
charts
If
look at the
Bar
intraday
charts,
since you are trading short term?
the past six months.
covering
it.
at a few ticks?
you
primarily
on big positions.
is probably
charts and say, \"I'm basically
scalp from the long side?
Not necessarily.
very, very short.
Is the
I would start
with
an opinion,
do you
but if I saw something
to
fact
that
you started
off with
a chart-influenced
trading
bias
winning?
Yes.
minutes?
is less
Were
risk. The object is always:
there periods when you were unsuccessful,
or did
consistent?
risk.
Minimize
your
Have
you always been a scalp-typetrader?
Well,
I evolved
Consistent.
Didn't you have any
from a pure
bullish,\"
my mind, I would adjust.
a key element behindyour
Yes, or seconds. Just becausethat
speculator.
versus scalp?
Right.
change
I assumeyour
are
are position
for?
looking
as I can
a trade.
for
is,
trading\342\200\224that
you
trades
with.
out
started
Do you use any
what
well below
percentage,
Basicallythen,
to fall back on.
you.
For your type of
trade,
are.
small
a day, all day, every day.
don't need any
dumber you
are, the
you
is for
have
didn't
six hours
now, what percentage of your
Right
A
I workedhard. I stood
371
scalper to a combination
of
scalper
losing
and
Yes, I had one or two.
months?
you
remain
Tom
372
Baldwin
Tom
Baldwin
373
Is that a characteristic of winning
But not two together?
the
They have less fear than
traders:
losers?
No, never.
Yes.
What
come to trade on the floor
of those who
percentage
after five years, versuslosing
around
their
stake
are
still
and dropping
out?
Can you size up a new trader on the floor
and
makeit or not?
Less than
less than
What
20
That is really the
percent.
Yes.
are successful to the point of
percentage
at least a couple
keeping
It is like
small
of traders.
fraction
any other industry.
How
many
people
get to be president
Motors?
General
What kind of things would tip you
separates
the 1 percent
No. Paying attention
or gold. Watching
Jones
a lot of hard work, for one. It's perseverance.
You
you have to have a total
to do it. Also,
business,
money. You can't trade for money.
in
Do you
mean
our
as
long
have
disregard
with
for
can't
Exactly. Mostpeopledo.
guess
Right.
another
way
of saying
it
is you
the
traders
are doing, suchas the
Dow
in the pit.
Patterns?
Yes.
In other words,
standing
have to have almost no fear.
there
are not paying enough attention. They
are
to
a
trade
here
and
are
but
not
trying
pick
there,
they
they
absorbing everything that is going on.
are usually
too high. They can't stand
way
to pick it up. Because it is like any job, if
you stand there long enough, you have to pick it up. It is just a matter of
how long you can afford to stand there before you do.
Right.
I
other markets
to what
to love
with
as you like the position, you
stay
\"I'm
$1 million on this trade, and
losing
That you can't think,
You
I could have bought a great house.\"
$1 million
real terms.
translate it into
it?
fundamentals?
mean
from the
other 99 percent?
It is
he is a loser?
that
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
Do you have an opinion about what
Yes.
off
Mostimportant,
In other words, a very
of
and
making
million?
percent.
Right.
if he is going to
and it's probably
of thumb,
that.
of
One
rule
tell
there
Also,
their
expenses
and hack it long enough
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.
Yes, but I did start as a one-lottrader.
becauseI had to make money. I only
At
what
successful
at
And
had
I wasn't
$25,000
really comfortable,
to my name.
were you confident that you were going
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
I bet
Right,
most people
is great,
\"This
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
when
$1,000,
They
they're
getting
paid $500 a week.
all
a
of
are
the
about
Now,
sudden, they
thinking
money.
The
out?\"
it?
minute
are
You are never really confident in this
question.
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
That is an interesting
because
business,
for the right spot?
Waiting
Well,
375
Baldwin
Tom
Once you
think
Yes.That
is what
the money, you are dead?
about
happens to the
usually
public.
money.
What
of your
percentage
One day
out
Has that
percentage changed over
That
Get
often.
is over a long period of
From
your
public
trader\342\200\224do
perspective,
time?
forcing
trait
If I can. My
what does the average trader\342\200\224that
is,
point
is that
is a losing
trade, I wait
Then I try
and
I have a lot of patience
and I wait. If I know
it
what I think is the optimum
time
to bail out.
for
reverse.
wrong?
trade too much. They don't pick
When they see the market moving, they
an important
out.
Quickly?
time.
They
they end up
is your own way of handling losses?
What
days are losers?
the trade
many
people
their
want
enough.
spots selectively
to be in on the action.
So,
rather than waiting
don't have.
patiently.
Patience
So, if you realize you don't likethe trade anymore,
but you'll pick your
time?
is
Right,
but I will
get
out.
you'll
get
out,
Tom Baldwin
376
Let's say you
It
are
At what
street.
far it has gone against you. If it's
how
depends
at some
that on a day when the marketisa one-way
do
point
you just have to cough it up?
doing
point you just throw
it in.
You just start
bailing
out.
But you usually
have a feel for
when
that
times
you a long way,
days happen maybe three or
Those
a year.
four
against
is the thing
to
do?
Baldwin
Tom
Your trading size has obviously
since you
grown
quite dramatically
first got into the business. Has that made it harder to trade?
Yes, you
has
it
happened
before.
You need to changeyour
to adapt.
have
selling, becausethe
is continually
market
What
changes have you seen in
Well,
you
can trade
at each
hundred
Yes, because
377
the
changing
bigger size. Now you
tick. It doesn't
move the
can
market
ways.
since you got in?
market
bond
subtle
in
and
of buying
method
trade
usually
as much.
a couple of
How about a thousand lots?
in a trade, you are better
But normally, if you are just a bit behind
in your
direction
and try to sell
if you let the market movea little
off
to dump
it in
instead of just trying
on strength, or buy on weakness,
a hurry?
It
on the liquidity
depends
is amazing how much
at the time. Lots of
there
liquidity
On average, if you had
move the market?
to dump
Dependingon the time
of day and the
times
is when you
a thousand, how
can get out. It
you
want
to get
much
out.
would
that
Right.
Is that
a key element to your
Yes. Never
give up
will just get
discipline.
Great.
out
on
a trade.
trading
style?
said,
\"Yes,
Many traders who are in
a losing
it is going to be a losingtrade,
of getting out here at 7, maybe if I wait
minute, I can sellat 10.\"
and
just
1 or 2 ticks.
Not much at all?
trade
have to have
because
you
they were taught that
if they just had
around.
But
Those traders will always be
some patienceand
maybe
liquidity,
but
No, not
size been an impediment at
Has
instead
sweat it out for another
much.
Yes,it is harder.
the
floor
knows
all
if the
liquidity is that good?
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 a matter
of just wanting
to
get out
willing to stand the pain a little
it?
off. Is that a fair way of putting
were
to stop the pain? And
longer,
they
would
if they
be better
I would
success,
Yes.
might
They give up too quickly. In most cases, if you don't give up, you
a five-yard
loss into a two-yard loss.
be able to turn
think
almost
they
Lots of times
would
that
that because you have a long-term record of
more often coattail you.
is true, and that
When you go to offer them,
they
also
makes
it harder to get in
are all offering
too.
and
out.
378
Tom
How
do you handle those situations?
You
have
your spot. You
go for it.
to pick
come in and
then
Does it become
Do you
to wait
for the
big
paper
order to
the pit
want
sometimes
you are selling when you are really buying?
Yes,sometimes.
But
you can't trade big size when
generally,
Whenever
you
are
long and want to liquidate,
also
the other,
You want
you just wait
is,
have
one
off the
to trade
by seeing
how the
new
fundamental
comes out one way
to be first.
the opportunity
before the crowd does.Are
there
them.
I use
information?
what I am going to do if a number
and I usually
to get
new
the first
by being
I know
information.
or
you
normally
right
trade
stand
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
in
and low for the
done
tens of thousands of trades. Doesany
as
out
particularly emotional?
You've
a chart?
week,
the halfway
backpoint,
or long-term perspective?
for short-term
100-lot
first
The
kind
What
You
Short
come out,
numbers
fundamental
important
any
market respondsto the
Yes, but
doing that.
So, frequently, if you are
for the bid to come in?
fundamentals?
use
Do you use the fundamentals indirectly, that
a chess game, where you
like
that
thinking
have
379
Tom Baldwin
Baldwin
I did. It was a milestone.
was that for you?
of jump
to go from one lot to five lots to ten
tend
term.
single
lots to twenty
lots to fifty
remember
that trade?
lots.
term
Short
I guess
as
possible,
in your
short
case meaning?
as possible.
and minimize
your
You
get
So, you
in a trade,
make money as fast
as
risk.
that a lot of times, bonds will take out one- and twoweek highs or lows by a few ticks and then pull back. The price
like a trap for the breakout
action
almost
seems
Is that a
players.
I've
noticed
market?
pattern in the
bond
Yes. It always
has been.
probably went from 50to 100?Do
you
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
It
almost
a much
sounds
Well, almost. But
like you did your first
I
wasn't
a very
100-lot
as a dare?
good trader then.
I
immediately
Tom Baldwin
380
ten more. I was trying
then
bought
ten,
to 22
offered.
By the time I got
out,
to bid
at 23, and the market went
ten different
100 lots.
I had
because I didn't know
how
to cover
But the trade worked
out
for
people
in the trade,
Are you always in
there days when you have lost
days when I've lost control.
were
you?
Oh yes. Well, actually, the word got out that this small trader had done
a 100-lot.SoI had to go up to the office to talk to the clearing firm after
that
stand
out?
couple.
You
have to say that
Any
A
close.
long had you been trading at that
about
any day
you lose a couple of
dollars.
million
How
or are
control,
control?
There
the
381
Baldwin
Tom
time?
Were
those
Yes,
one-way
days one-way street markets?
Six months.
That was pretty early on.I assume
to handle
100 lots?
inadequate
Right.
I had
Even
at $100,000, that
Yes,
only
probably
was really
you
made $100,000 by then. Maybenot
cover
wouldn't
even
that.
you for much of a move.
[In bonds, 1 point equals 32 ticks (the smallest
price
I told them, \"Look,I just thought
it was a great trade at the
time, and I'll probably
How long was it before
never
you
do it again.\"
I'm
What
was
position
your
When
did
you
Five full
start
maker,
I take
the other side
at the October 1987low
in
bonds?
getting long?
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
Five points higher.
100 lots again?
traded
streets.
trend.
I was long.
1 point.
movement).]
Two
capitalization
your
of the
just never
thought
about
the
risk side of it?
No, if a guy bids 25 for 100, and I think
\"Sold.\"
Is thereany
it is a great trade, I just say
below 77,1 was long thousands of contracts.
were also heavily
That was the
day
long.
we gapped
sharply lower. Who
The commercials just kept selling.
element
better be careful that
That came later.
that
traders
it broke
trader that
in your mindset as a
I'm always in the game?
says:
I had
Didyou
Yes.
have
second
thoughts?
was
selling?
Other
382
you think if the market went down to
Did
Baldwin
Tom
maybe
76,
it could
70?
No.At that point,
you had to say it
all over
was
go to
Tom
383
Baldwin
You have to pay your dues to
Are there peopleon the
because
ahead
they just
right side of the
and experience.
analysis
No,
Was that an example
of your being patient in picking
get out, even when the initial trade was wrong?
your
spot to
not
market?
for long.
make it, but
it is
what
you
ever use any trading
No. They
wouldn't be there if they
Do you think
Sure.Why
systems for
systems
trading
do
they
weren't
are not good traders, but are way
are
happened to do a coupleof big trades on the
Can anybody
really get by just on luck?
The rule of thumb
is if you
have lasted a year,
you
will
you
are
influenced
by because you respect
doing?
Oh, yes. They are
wrong.
For example, if
trading
approach.
So, that is actually part of your
trader X is a goodtrader,and he is on a roll, and you are thinking
are a losing game?
indicators.
of selling\342\200\224
exist?
And
he does,
then you
know
you're
right.
But if he is buying?
Becausepeoplearen'tconfident
system,
you
in their
could make
own ability. If you
millions. Why
would
had
you
a really
sell it
Then
you
Are there
Doesluck have
who
anything?
You tell me.
good trading
for $29.95?
they
floor
hard.
Are there traders that
Right.
Do
the
Right.
and done.
Why?
Technical
luck.
get
anything
to do
with trading?
Trading is like any other job. You work hard, put in the time and effort,
and make your own luck. I was lucky that the first 100-lot I sold was a
winner.
But why was I lucky? BecauseI stood
there
all day for over six
and honing market feeling. When
the opportunity
months,
developing
occurred, I didn't hesitate.
hesitate.
Maybe
you don't get into
the
trade.
traders who can't succeedbecausetheir
ego
is too
big to
ever be influenced?
Yes.
Is part
of the success a willingnessto
Right.
You
have
to adapt to your
success.
not
always
do your own thing?
If you
make a lot of money,
384
all of a suddenyou
you were right
As soon as you
start
to think
\"I'm
think,
you are infallible.You
of all those little
because
was
factors
Tom Baldwin
Tom Baldwin
the reason
you followed.
could a floor
forget
that
the guy who is going to lead the way,\"
you
seconds,
the
Actually,
let ego get in
to swallowyour
ahead,
doesn't
mean
thought
that
the
and get
pride
After you get way
money
only in the sense that
ego
cannot
to be a good trader?
egomaniac
traders have no ego. To bea great
best
have a big enough
yourself. You
an
way
trader,
you
have
confidence
of a trade that
is a loser;
you
have to
in
you have
out.
anything
a temptation to say, the extra
anymore,
maybe I shouldcashin the
chips?
I
never
way. Obviously,
when
I started,
I needed to make
money to support my family, but I never had a goal to make
dollars. I said, \"Hey, this is great, maybe I can make
$100,000.\"
You
passed
that a very long time
ago.
a million
have any other goals?
Do you
You
just
do what
Yes. And I hope it
you do because you
enjoy
it?
lasts.
incredible trading achievements madehim an ideal interview
candidate for this book. However,
I did not really expect his comments
to be pertinent
to myself
or other off-the-floor traders. After
all, what
Baldwin's
most
traders
tend to think
of their monetary implications\342\200\224a
terms
lossesin
in the way of making trading
For example,
assume you
on a trade, and quickly
find
frame
of gains
of mind
and
that only
decisions.
yourself
to risk up
to
$5,000
down by $2,000. If, at this
point,
originally
planned
extra
of the trade in terms of money (for example,\"the
you start to think
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
because
no longer
you
on
liquidate
impulse
like the
position,
but it is quite
simply
because
have
you
another
translated
matter
to
the risk
into
terms.
interesting point made by Baldwin is an unconventional
wait and choose
instead,
get out of a losing trade too hastily;
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
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
the
a risk controlstrategy.
No.
and
time horizon is measured in minutes
for weeks
to traders who hold positions
the interview
surprise,
keepingscore.By contrast,
tangible
is there
relevant
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
gets
have to be somewhat of
whose
was
most
Perhaps the
Right.
you
say
To my
doesn't
make a difference whether it is your idea or
really
or losing
is all that counts. Where the idea
somebody else's. Winning
came from isn't important?
Do
trader,
that
or months?
get slammed.
So, it
385
Tony
Saliba
\"One-Lot\" Triumphs*
Tony
Saliba
came
to the floor of the
Chicago
Board
Options
Exchange
Saliba was ready to try it on his
to back him for $50,000, and after a
another
trader
favorable
self-destructed.
He pulled back from the brink of
start,
nearly
his trading
and has been successful
ever
disaster by altering
techniques,
m 1978.After
own. He found
a half-year
of clerking,
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
trading
profits.
than
consistent
\342\231\246Readers
unfamiliar
understand
the trading-related
with options may wish to first
references in this chapter.
read
Appendix 2 in order to
Tony Saliba
388
Although
extensive,
is
the homework
required for Saliba's successfultrading
he has nonetheless managedto diversify
into a wide range of
real estate investments, a software
company,
chain. Overall,his extracurricular
endeavors
business
but they have indulged his
proven only modestly
profitable,
other
ventures,
have
for
appetite
variety.
form
generation
of
his
were
being
conducted,
Saliba was
business venture of his life: negotiating
a French bank to back him with several
hundred million dollars to
a major
and train a
trading company. His goal is to discover
involved in the
successful
the one facing the screen.\"
I'm
God
including
During the time theseinterviews
with
was, \"Thank
a restaurant
and
389
Tony Saliba
most
important
traders.
Saliba is a 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
time keeping
having a hard enough
your mind focusedas it is.\" My
second thought was, \"It would
be incredibly
rude not to pay full
attention to Tony,
over to spare me the
hobbled
especially after he literally
inconvenienceof having to reschedule our interview.\"
My third thought
to become
a trader?
What
led
I was
a caddy
for some grain
a friend
of mine asked me if I would
college,
you
traders
I was in
when
In
school.
high
I
like to be a broker. thought
for. So, I
he answered. I said, \"What
he said, \"you do it on the phone.\"
is in Indianapolis?\" \"None,\"
exchange
I had this impression
of: \"Hello New York, buy;
sell.\" When I
Chicago,
I
I
a
found
was
salesman.
out
got there,
I asked the guys in the office, \"Who makes all
After
a few months,
the
in
this
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
he meant
that
same
doing the
thing
said,\"Yes.
Great!
grubstaked
me with $50,000.
Where?\"
as the guys
I had
caddied
\"Indianapolis,\"
Isn't that unusual, giving
to a
$50,000
kid who used to caddy for
you?
It was,
because
except that
of his high
for only
$10,000,
he
very wealthy and needed to get off the floor
He owned a seat that he had bought
pressure.
and just
needed the ability
going to help him
account.
I was
What
made him think
He had
was
blood
some
heard
and he basically
took
you
rumors
do
could
make
around the floor that
on me.
I went
from $50,000 to about $75,000in
all these
volatility
it as a trader?
I was
a hotshot
clerk,
a chance
happened?
market becomesmore
in a customer
that.
What
on
to trade
spreads
two weeks. I had put
[an option position that will gain if the
volatile]
and they
the
first
were getting
pumped
up.
Tony Saliba
390
Did you
think,
\"Boy,
I thought,
\"This
is it!\" I mean, I wasa
was taking
the
letting
liquidating,
Didyou
this is easy\"?
genius.But
what
I was
really doing
were
side of positions the other brokers
opposite
them out of the market
with their profits, while I was left
and implied volatilities were very
This was spring
1979
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
the bag.
holding
only
about
was feeling
$15,000.1
DC 10 crash at
O'Hare
was when
bottom.
I hit
in May
Tony Saliba
suicidal. Do you
1979, when
all
those
remember
people
the big
died? That
feel
better
You had a stop on your
Exactly, exactly.I had
give it one
you had a cushion?
because
\"This is great, I've still
I said,
Yes.
391
more
on my career. So, I decidedto
go
back
and
shot.
Did the fellow who staked you
ever say
grand in my account.\"
fifteen
so to speak?
life
a stop
got
know
how
you had lost? Didhe
much
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
since
mood?
have exchangedplaceswith one of those people in
on that day. I felt that bad. I thought, \"This is it; I've ruined
Yes. I would
that
plane
my
Did he ever ask you
for
the
No, he just moaned
and
groaned.
life.\"
Did you feel guilty
you had lost someone else's money?
because
about
much
Yes,and
I felt
do with
like a 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?
Yes. In June 1979,1decidedthat I better find another job. I went to the
for
that my dad built
of restaurants
Levy brothers, who owned a chain
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
month,\"
and
inheritance
his
So,
money
rest of the money back?
he made in
He had become wealthy
another
option trading. He had bought
life. He told me, \"If you lose
I spent
the next few weeks winding
the
through
He really didn't know
business.
seat to have something to
$5,000
down
more, we'll 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
can make
things,
you
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 hard
To this
I teach
Anyway,
in
position
and discipline.
homework,
same
this
at
time, I still had the remnants of a big spread
of liquidating. It was a
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
the same
to them. I was adapting
of a suddenI found myself responding
of
instead
in Boeing
to
I
had
learned
except
Teledyne,
technique
and
dollars.
for
halves
I
was
or
a
for
an
scalping
eighth
quarter,
scalping
I was doing
getting
you trading
were
size
What
didn't
like me because
way. They wanted to do ten- or twenty-lot
did
On the
and
it's first come, first
floor,
bids
someone
do 99
For the most part,
you take
Oh,
did
who
If you
served.
have 100 to sell
first for just one, you have
guy. The broker could ignore you
the
if he
wants,
rules.
you ignored?
did,
The
brokers
but the market
makers on the
are the order fillers,
the locals who trade for themselves.On the
are separate.
the best
ego get dented by
these
really
traders
successful
railing
on for almost a year,
it went
day
in, day
to pick up your trading a little
tempted
out.
bit?
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
options
makers are
the two
exchange,
harassment
they introduced
you
puts
were taking
in June
on the floor finally
end?
1980, the lead trader, who had given
me the hardest time, hated them. He said they were bad for the business
and he didn't want to trade them. I seized that opportunity
to really study
what
would mean to us, and I wasone of the first market makers to
puts
you mean order fillers?
floor
time. The individual
trader in the crowd. He had
virtually a legend in his own time. He started
me right from the beginning. He made
life
my
the longest
miserable.
trading
Actually,
Yes.
was
and
leaning on me and ribbing
start
By brokers,
gave
for
was
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 I
with the number two
The brokersnever
called me \"one-lot\"
me the hardest time
made millions
When
Were
yes.
a lot of ribbing?
I! They
W\302\253reyou
to do his one before you
but if he does,he's breaking
Did
Oh, yes.And,
you get someone to take one lot?
options
in Teledyne?
I was
orders.
Exactly.
How
trader
one-lot
you?
words, you were just a nuisance.
In other
you the only
Were
Did your
at the time?
lot at a time. The guys
one
in their
393
that I was in
position
my
Saliba
Tony
that.
guys
my
work,
Saliba
puts.
it opens up a whole range of
new
strategies.
market
Oh, unbelievable.
they
had
These other guys
were
set in their ways,
only been there a couple of years.Soonerthan
you
even though
might
think,
394
this
Tony
Saltba
one trader befriended me and suggested that we work
on advanced
We started working
strategies, getting real
number
together.
creative and
No, we did everything
Didn't
395
do you mean you were
By buying
butterflies,
long the
the wings [that is, the higher and lower
strike
price
you
by
hand.
a computer?
on
Writing
out all these \"what-ifs.\"
still have to be guessingright on priceand volatility
direction?
options]?
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
could.If I chained
we didn't have
that had a
market
to peg
direction, because we were setting
up spreads
be highly overvalued because
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
You
or long
middle
abstract.
you working these out
Were
Saliba
Tony
would
have to guess right
on
volatility.
However,
my mind.\"
just answer,\"I changed
I started
on my own.\"
it, I'm working
Finally, I just said, \"Forget
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.
in
couldn't believe
The
a
$200,000
my clearinghouse
guys
day.
making
tons
of
was
the
there
sheets;
just
paper.
Then
wide.
fairly
enough
of them
I would
do an explosionposition
month.
do
What
you
mean
That's basically
together, my profit
zone
in
would
a more
be
distant
by the term \"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
feature
of the explosion position is
moves, the delta [the expectedpricechange
in the
market
the
in the price of the
position given a one-unit
change
in your favor. So, you are really
increases
betting
underlying
market]
on
volatility.
What
kind
of trades
were you doing?
Exactly.
I was doing
everything.
I consider
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
is the
opposite of what you do with
the
Yes. I put
me,
butterfly.
on the butterfly
in the front month,
where time is working
and the explosion positionin the mid- or back-month. Then I
complement
that
position.
with
scalping
to help pay for the
time
decay
for
in the explosion
396
Tony
In other
words, the explosionpositionis your
big move,
while
What
One of my
Exactly.
one position with
offsetting
always
you
words, were you always delta
total
in
will remain
equity
either
neutraP.
[An
another?
position
option
roughly unchanged
In
other
in
which
for small pricechanges
but once in a while
I would take a significant
net
before
I was
thirty
I was
before
in
The stock had dropped sharply
1984.
and
I was
building up
the stock started
in the out-of-the-money Octobercalls.Well,
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
a position
want
buy them. \"You
ten
on for over
trading
and
would
This
went
Why
were these
stock
to sell them at Vk, I'm
Vu bid
Program
at
Buying back their own
$200
138,
and then
inched its
way
back
per Share.\"
I thought
made
five
months
know.
the $180 calls. Overnight, I
to $300.
I'd stay
the business
in
somehow,
but
off the floor.
work
How long did your
last?
retirement
About four months.
bored?
I missed
So, in the
I missed
markets.
the
money
beginning,
The next four
to
the excitement.
was the goal, but once you
got
it
there
became\342\200\224
Yes,
it became
secondary. Maybe if I had
specialin my life, I might not
I understand
up
going to do?
were
It made me feel like something;
stock?
The stock was at $155, and I owned
The stock eventually went
millions.
were great.
I didn't really
Yes.
On
think it was going to go up anymore.
up to 150.1 guess they didn't
of
news
because
in
9
at
9:20
Teledyne
they stopped trading
May
a Stock
news comes across the tape: \"TeledyneAnnounces
pending. The
Repurchase
you
Were you
days.
down from 160to
Did you know what
for fifty.\"
Pacific Coast traders leaningonthe calls?
had gone
million.
$8-9
position.
was your first really big trade?
Teledyne
Yes.
I was a millionaire
Well,
How far were you up then?
About
The
in life was to becomea millionaire
goals
retire.
direction.]
Usually,
What
after that?
twenty-five. I had
decided to retire when I was thirty.
On
May 5, 1985, my thirtieth
I walked off the floor and said
birthday,
good-bye to everybody and that
I
was it.
was never going to comeback to the floor.
and
Were
397
happened
is paying the bills, that is, the time
of the explosion position.
cost
decay
scalping
your
Saliba
Tony
in case of a
bet
money
Saliba
October
I
was
one
expecting
and kids, or someone
best trading periods was the weekof
crash. Tell me about it.
of your
1987 stock
a big move, but
So, I started building
a wife
was my life.
gone back. But trading
it gave me a reason for
being.
have
the
same
I didn't
know if it would be up
type position
that
I had
the
or down.
in Teledyne.
398
The
spread combined with
butterfly
the
Yes.
But you said you
What was the
Yes,but
What told you the market was going to
Still, you
feel
you
expect
Actually,
I thought
were
it in the wild
that
gyrations
a big
have
story
move?
were occurring by late
the move to be on the downsideby
going to be on the
it was
going to attack the
On Wednesday
old
highs
that
confident
the
that
1988], it sounds
[April
was
the
cover
like
you knew the
I'm on the floor. But
trading,
it that way
that
article
is completely
They make it sound
That's not the story.
I was concerned about the positionsheld
firm. One guy
by
my clearing
in particular
had a huge position, which
he wasn't
closing, and I had to
spend a great deal of time on the phone. Now, that's not as dramatic as
the way the magazine
wrote it up, but that's
what really happened.
I thought
They
like I planned
again.
wrote
to
sell magazines.
and plotted to avoidthe
floor
that day.
the
Didn't you also sellyour
I
end of the week?
is a high
the follow-through
on
Did you have any
inkling
correlation betweenthe
the next
Moniday\342\200\224at
of the
least
action
on the
on a Friday
the
confident
hit
that
for the
there
magazine
market
to
bounce
didn't
Becauseit was
Success
Yes,if I'm
At first,
upside.
in
misleading.
fell apart.
before the crash, the market
if it had
but
of
churned.
kind
back,
Now,
Thursday,
the market
then I would have been confused.But instead,
rallied on Friday,
I
down.
At
that
we
were
on
was
sure
cracked
point,
going
Friday.
and
one.
market
seat
that day? You must have been
really
was going down to sella seat.
seat before the market opened.I figured
if I didn't hit the bid
I had seven seats; I
seat, someone else would.Anyway
just sold
opening.
sSze of the impendingmove
on
the
Was
this
the first
a
exactly
liquid
market.
time you traded a seat?I mean
seats
aren't
Monday?
Do you know
thought
awfully
your
I always have insurance.
I am;
time?
week
the
of
it
following
been
way
once told me,
off first until
hand
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?
When did you change your mind?
Yes,and
have
must
A trader
second,
other hand is on second.\"That's the
September.
we
was going down?
market
going sharply lower on Monday morning.According
could
calls that
out-of-the-money
to have some insurance.
you never take your
wanted
I just
\"Saliba,in stealing
decay.
Did
the
thought
bought
in this case?
position
explosion
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
what
thought was going to happen Monday?
lower,
open
go down sharply, and then bounce
I really
the market would
I
Yes, it was the first time I did it like that: trading the seat round
one day. But I have traded seatsbefore. I trade
them
depending
turn
in
on my
400
mood
in
our
Saliba
Tony
in the market. Onbalancethough,
I want
Saliba
Tony
to be long seats. I believe
401
wanted volatility.
But everybody
industry.
But in that
I figured,
circumstance,
I have
\"Hey,
did
it
That's when
the register
really started ringing.
was so close to the earth that everybody
needed
like a good trade?
seem
a lot of exposurein
seats\342\200\224afew
dollars
million
some protection.\" I sold that seat for $452,000
it back the next afternoon for $275,000.
the morning and bought
take
worth\342\200\224Ibetter
the
only
did
you
the
sun
in
Let's take the
of the fence: What
side
other
did
the
who got
traders
do wrong?
that Monday?
make
That has causedmea lot
the day that
zinc ointment, and I was
that had some left.
guy
buried in October
How much
It was
I would rather
of headaches.
not
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?
About
95
percent.
You kept
most of it! But
temptingto
take it?
just
the
profits
were so huge. Wasn't it
Sure,
some
Are you
hadn't
cover
was because I felt my long puts
The reason I didn't
gone
to parity.
The puts that were thirty points inup enough. They all went
at $30. In other words, the option premiums
the-money weretrading
wasn't
of
intrinsic value; the market
consisted almost
giving them
entirely
I thought
market
Given
the
enormous
time
value
volatility,
premium.
any
that was crazy.
So,you
you
figured
Yes, and do you
insurance
at the
know
would
wait till
what
You were basicallybuying
I could
what they wanted more of: Half
wanted calls.
the
next
day.
more
hundreds
of my
the
world
looking for something
all the
Why
in and
to get them today?\"
going
to do,
he just
but not knowing
do
earner.
you think?
stood there. He didn'tsay
kept going over his sheets,
what
to do. So he missed
to the marketso different
from
the
way your friend responded?
sure
more
slate, so that
his position
what
but you
risk was. I always
about it. I walk
into
I can take advantage of what
to worry
A clean slate soundslikeyou
know
But
was the way you responded
short calls.
didn't
annual
say, \"Hey, Jack, what
opportunity.
I don't have
volatility.
have done. The next day they
I walk
to me. He lookedshellshocked.
Hejust
a word
He wasn't
I did to hedge myself? I bought
close on Monday. I covered
It was the best thing
did. I have one friend, who is a million-dollar
On Tuesday morning,
obviously
hold
come
positions
define
the pit every
is going
in with
day with
I'm
always
hedged,
and
a clean
on.
a flat position every day,
overnight.
wanted puts, and half the world
I mean that
my risk,
and I'm always prepared.
402
Tony
Do you always know the maximum
Do you always know what your
Yes.
between.
something in
My
case.
Tony Saliba
Why do so many
come to the floor end up
who
traders
How do you
the biggest
Is that what you do?
they lose sight
and
marketplace,
ethic. Those are
the
of
that come on the floor is
traders
problem with some
they are bigger than
think
period?
it.
Yes.I either
they
a losing
How do you lose money? It is either bad day trading or a losing position.
If it's a bad position that is the problem, then you should just get out of
When
that
handle
losing
everything?
I think
403
limited.
is always
loss
that you hold?
worst case is?
or
it explodes,
could happen? The market
sits,
I
know my worst
But no matter what
happens,
what
Now,
in a position
risk
Saliba
don't fear the
and the hard work
market.
the
it or neutralize
springs
it,
then
because
you are back afloat.
a leak,
you don't drill
to
making
another
hole
to let the water out.
They
their
discipline
who get blown out. But most guys
traders
liquidate
are in a boat that
you
on
the
What if your trading lossesare due
What
do
you
your
bad decisions?
do then?
floor really work hard.
the
is
What
biggest
the public has about the
misconception
marketplace?
The
idea
that
the market has to go up
for
them
to make money. You can
With
if you use the right
kind of market
strategies.
there
are
and
the
markets,
futures, options,
enough tools
underlying
availableto set up a game plan for any situation.
make
in any
money
In other
words, the public hastoo much
way: The market
about program trading
Yes, it is the American
never
said anything
bull market. Once the
program
trading
became
of a
bullish
Take a day off. If I get myself all wound
in the sun
up, I like to lay out
and bake for a while
and let all the strenuous stuff
go out of my head.
What are the
elements
Clear thinking,
ability
is
number
one:
of good
trading?
to stay focused, and extreme discipline.
Discipline
Take a theory
and stick with it. But you
also have to be
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
been proven
bias?
to go up. The government
we were in a three-year
when
has
started
going down, all of a sudden,
a major concern, and they set up commissions
market
Trading
rules
you live by.
I scalein and scale out of my positions, so that I can spread out my risk.
I don'tliketo do all of a large order right up front.
galore.
For the average person, like my mom or dad and their relatives, the
biggest misconception is that they think when the market goesup, you
and when it goes down, you lose. People need to approach
make
money,
and say, \"I'm going to be a little
more
neutral
it from a
long
standpoint
in this
because
category and short
it
is infinite.\"
in
this
category,
but limit
my
short-side
risk
What
else?
the marketplace.
Never take anything
for granted.
respect
Do
your homework. Recapthe day. Figure out what you did right and what
did wrong.
That is one part of the homework;
the other part is
you
do I want to happen tomorrow?What
projective.What
if the opposite
happens
Always
404
What happens if nothing
occurs?
and plan, rather
ifs.\" Anticipate
you made your first
When
Think
happens?
Saliba
all the
\"what-
react.
than
few
through
Tony
it away
to limit your worst casepossibility?
My trading strategies were growing
I made
some more, I started putting
No.
after
real estate, stores,exchangeseats,
and
new capital. Then
investments:
other
into
money
Then
when
the
like
that.
things
I needed
and
to use that term\342\200\224onMonday,
of cash anywhere,
have a big chunk
T-bills.
of million
dollars
out of the flow and bought
later, I used the money to buy an annuity.
market
crashed\342\200\224I hate
I didn't
realized that
your trading style issofocused
because
I guess
first time you felt the need for
seemedto be saying
do with
nothing to
Yes. What
shut
they
set
have $10 million
How
in your
trading
account, but
were
level. First, I wanted to become
I was twenty-five. Then
I was thirty. I did it before
to make
so much a year, and I did that. Originally,
I set goalson
all numbers,
a software
do you
I know
family
fulfillment.
is that
all the
How do you
money in the world
You
it was
thought
at one time.
YesI did.
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
your
personal
I'm able to handle it well
from
a business
life?
standpoint
it clobbers
they
me. It doesn't
require.
People
Unless it is about
business,
Are
that conscious
like this
standpoint,
allow me to give
but
a social
to women
from
the time
like to just sit and talk sometimes.
you, I'm out of here.
with
you
always
of time?
a monetary
but
I want to do somethings
and
net was when the market
could occur and have
All
isn't the answer.
and friends that
be fun. For example, I'm currently
company
losses, the
have that
I don't
judge success?I don'tknow.
goals?
a millionaire
before
I decidedI wanted
Now,
if you
limiting
down the game?
Until recently,
goals
a catastrophe
19,1
so I took a couple
Then, a few weeks
but
needy,
you.
happens
How do you
the
a safety
that
on
October
405
success,but I don't feel like I'm a success.I really don't. I feel like I've
madea lot of money, and I've been successfulat this one area in my life.
I help the
did you sock some of
million,
Tony Saliba
the
that
numbers
are not
working
company. I also want
aren't
so important
Yes.Most
people
and watch
TV?\"
aren't.
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.
judge success?
I used to judge success as being the best in your field, like Bruce
Springsteenin rock music. In my industry, it would have to be dollarI'm
a
of life. A lot of people think
wise. Now, I think it is more quality
Do you?
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
Tony
makes
Saliba
Tony Saliba
you different?
it
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 strategy.
This same Teledyne example also illustrates
another
important
of the superior
characteristic
trader:
the maintenance of rigid
risk
in difficult circumstances. It must have been very tempting
for
control, even
Saliba
to trade 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.
Working
is preparedfor
hard
and
scenarios
examining many different
is a critical elementof Saliba's
all contingencies
he
so that
success.
he can take advantage of situations
By anticipating all the \"what-ifs,\"
such
as the October 19 stock slide,instead
of being
immobilized
by such
events. For many
of someone
image
out of markets with
people,
using
great
less glamorous.In the
the
concept
of a great trader conjuresup
an
moving in
and
a shoot-from-the-hip
agility
majority
approach,
and a near sixth
of cases,
sense.
The reality is far
exceptional traders owe their
work and preparation. In fact, similar
to Tony
Saliba,
do
their
of
the
traders
will
\"homework\"
successful
every
many
very
or other business from interfering
with
their
leisure
night, not allowing
success
to hard
of market
analysis. When they stray from that discipline,
up costing them money.In Saliba'sown words,
referring
to a recently missed trade
due to his failure to have his orders in while
on a business trip,
\"It cost me ten grand,
and
all those little ten grands
can add up.\"
daily
I think
407
regimen
usually
ends
PartV
TkgPsyc^ogy
of
Trading
Dr.
Van
The
Dr. Van
the
K. Tharp
University
interest
strongest
applies
of Trading
Psychology
is a research psychologistwho
his Ph.D. from
received
Health Sciences Center, in 1975. He has
how
stress
affects human performance. His
of Oklahoma,
spent his career studying
winning
K. Tharp
is in the psychology of winning\342\200\224especially
In 1982, Dr. Tharp
a test that measures
to the markets.
developed
as
his Investment
and
traits.
winning
losing
Psychology Inventory,
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
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
currently
from his office in Glendale,
trading
success.
and studying
top
devotes
himself
California,
basic theory is that by teaching the winning traits of the top traders (not
he can dramatically improve the
methodologies),
specific trading
of less successful
traders and investors. In his most recent
performance
to turn his most successful clients into
\"superproject,he is attempting
422
Dr. Van
traders\" by extending his normal program of two
two-day
K.
Tharp
sessions
into
an ongoing semiannual process.
Dr. Tharp, he askedwhether
he could do a video
as part of his ongoingresearch.
SinceI thought such
I interviewed
After
tape interview
of me
in improving
might be helpful
my own trading
performance,
The
interview
for
lasted
over
four hours. Dr. Tharp
agreed.
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
an interview
I eagerly
would have me shift
the
direction
of my gaze (he later explainedthis
chapter.)
have
liked
to provide
my personal impression of
Dr.
course, which includes five books and four tapes.
However, although I reviewedthe material
briefly as background for this
the combination
of simultaneously working
at a full-time
chapter,
job
and writing
this book
did not leave me with enough
time (or energy) to
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
success
and was duly impressed with
his intellect
modeling
and insight into
basic
Tharp's
successful
413
K. Tharp
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,
developing
my
investment
strengths
and
trading.
and
psychology
get interested in the
connection
class
the
What
did
you
there
any
major
affect
research interest after graduate school was how various
human
performance. After
receiving
my Ph.D. in
I spent
about eight years doing fairly
standard
psychology,
psychological
For example,
research.
I helped standardize the current
Field Sobriety Test
the country are still using.
I was
While
Battery that police throughout
In
doing that, I also learned how to lose money trading
fact, I
options.
lost money so fast and so consistently that when I finally
of the
out
got
drugs
class.
editor
in analyzing
learn
the responses to your test? Were
surprises?
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
between
trading?
My primary
that
would take it,
McMaster took it and then
I was subscribing.
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
No one in
I've added an extra
How did you first
as a creativeproject for
so I sent it to R. E. McMaster,the
weaknesses,
of a newsletter
instruction
was intended
to facilitate accessing different
of my brain),
parts
and sure enough I would
think
of another point I had somehow
overlooked.
I felt that this interview
some important
yielded
personal
of these self-realizations
is briefly
(One
insights.
discussed
in the next
I would
Dr. Van
one\342\200\224intuition.
What
are
the eleven
Well,
the
psychological
rounded
is not
significantly
because
lack
a wellhas five areas. These include
to
make
motivation
the
money,
attitude,
for results. Motivation
and responsibility
with success, but I keep
correlated
to make money
it in the test
is very significant.
motivation plus high conflict
in the decision-making area. These include
factors
of technical factors in the market, an aptitude for
knowledge
to think
and the ability
common
biases,
sound decisions without
of such
There are three
making
factor
personal life, a positive
lack of conflict,
a solid
areas you measure?
414
Dr. Van
K.
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
independently.
to me.
interesting
those areas, what
Given
are
the
characteristics
of the losing 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
crowd follower. In addition, losing traders
impatient. They want action
the composite profile would
now.
suggest.
tend
to be disorganized and
Most losing traders are not as bad as
They
just have part of the
Have
in
your
ideas and concepts changedfrom
your
I designed
the
believethat
it's
test
traders.
How did you get started in
that?
I started using
the test regularly,
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
on
do about
each of the
investors
ten
areas\342\200\224both
to learn
with a source of help.The
pamphlet
about the areas myselfand to provide
first pamphlet
turned into a book. I
point to cover the subject
matter in five workbooks which
would
constitute
a course in the psychology
of investing/trading. After
I
finished
the second workbook, I started
in
training
decided
at that
Neuro-Linguistic
(NLP). NLP is really a science of how to duplicate
I was able to
success, and
of those
incorporate a number
techniques into my
course. The development
of the course
naturally led to a private
Programming
service.
consulting
were
early
anyone
I
so.
a matter of learning how.
Too many people get stuck by the
just
beliefs
they hold, yet they
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
many
they
and who couldn't.
Now,
to predict who could win
can win if they are committed to do
Primarily,
or
failed
case
me
examples
of people who
in consultation?
One trader who came to me
You now consult with
what
research?
losing
profile.
After
415
Dr. Van K. Tharp
to get him
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 him
drop
by one
to solve his problem.
that with another 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
results
I tried
boy in that he couldn't acceptadult
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.
late forties, he was still
responsibilities.
He
a little
still lived with
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
decided
to do it. I spent
two days listening
to him talk and then we did a simpleexercise
At the end of that
he was a totally
exercise,
changed
person
Another
reluctant
was
He
consulting.
probably
another
together.
took him
it probably
(although
exercise).
$650,000
trading in the
whether
BeforeI take someone
sort of methodology
frame,
day
trade
same
or
to
that they have some
I determinewhat evidence
for example, convince me? Have
tested
they
they
time,
think works.
testing
amount
signals
that one
I think that
test their
lack
of skill
is, in itself,
a
People don't developa systematic
approach
of poor judgment, lack of goals,
because
to trading.
psychological
impediment
or don't
distinguish
skill
successfully.
At the
internal
market's
patterns\,") how do you
are related to lack of
to a hindsight
evaluation,
can follow. I also am
it is difficult to make
or trading
in a short
money day trading
so I am skepticalabout
who wants me to help them
anyone
that
time
the
(for
on as a client, I need to know
that
Can they,
they have of that.
that methodology? Does their
or is it based on actual trading
convinced
about
approach
impediments to success?
psychological
approach
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.
conflict,
internal
What
are
the
peoplefrom
primary
being
psychological
winning
impediments that keep most
How can they
traders?
deal
with
each of
those problems?
is that when
What
typically
bring
their
to act
out those problems,but
happens
personal
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
your losses
those
two
Most
short
and let your profits run.
rules. For example, if making
money
cannot
people
is important to
is to most people who play investment
games\342\200\224then
you will
a
small
losses
turn
As
small
losses.
trouble
have
result,
taking
probably
the
moderate
to
take.
which
are
harder
into moderate
even
losses,
Finally,
losses turn into big losses, which you are forced to take\342\200\224allbecause it
have a profit,
when
to take a small loss. Similarly,
was so hard
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
you\342\200\224asit
a nonquantifiable
uses
problems
trading
over
made
the chart
from
direction
impending
of that
effects
417
Van K. Tharp
deal with
or sell whenever I get a feeling
\"I buy
the
later and said he had
markets.
In the case of a trader who
example,
to integrate
a week
me two months
called
He
Dr.
problems
with
not
approach
The markets
people
them.
to solve
the markets,
are a natural
they
place
them. Most people end up
The secondmajorproblem
people
have
is dealing with
stress.
Stress
and the biological fight/flight
response.
worry
really takes two forms:
information. If your
for processing
Our brains have a limited
capacity
with worry, that worry takes up most of the decision
mind
is preoccupied
left to perform
and you don't have enough capacity
effectively.
is
that
it
causes
One aspect of the fight/flight
people to
response
to
earlier
their
focus.
revert
narrow
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
space,
418
Dr. Van
are rarely correct. When
solutions
be crowd
to
The
followers.
Crowd
follow.
is a sure
following
A second
are stressed, they also tend to
of others providesa simpleexample
people
behavior
don't have to make decisions,but
to
lose
way
money in the markets.
followers
effect
important
Dr. Van
K. Tharp
of the fight/flight
I find
response is that
it
people to expend moreenergy.When
faced
with stressful events,
people give more effort to the few alternatives they do consider. They
keep on doing what they were doing\342\200\224only they do it harder.
Putting
more
energy into trading decisions doesnot
make more
money.
you
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
the fight/flight
to narrow
your
summary,
causing you
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
intention.
For example,
someone might have a part to make
money, a
to protect
him from failure, a part to make him feel
part
about
third
The
People
good
which
himself,
a part
you
establish
subconsciously.
What
carry
out
their
major
conflicts.
I'm not saying
helping
just
people
looks after the
welfare
these
of the
allow
parts, you usually
is
the
happens
parts continually
family, etc. Now, once
to operate
new behaviors
to
adopt
them
those new behaviors can produce
Sometimes,
This model of conflict is one of
my most useful beliefs.
intentions.
people
actually have parts, but it is very useful in
solve their trading
for me to believe that.
problems
You
that
have to make them
aware
of their
parts and then
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
causes
help
419
K. Tharp
a formal
the
with
of people having different parts in conflict
Could you provide an
difficult
to conceptualize.
concept
other a little
each
example?
I worked
was
not a good model for him,
he developed
a result,
He couldmake
than
trader whose father
a floor
with
about
that, this part
however,
was
in that he was an alcoholic.As
a part to protecthimself
kicked
in to make
sure that
being like his father.
if he made any more
from
but
per year trading,
$75,000
he
would
not become
successful.He was the one who made $650,000 in about
after we had completedthe parts negotiation.
Are you implying
level
common
is that?
Halfthe
that
because
subconscious
two
too
months
actually want to lose on a
people
intention?
How
it fulfills some other positive
some
I work with
traders
His father
successful.
fairly
have problems of this
nature.
I think
it's very
common.
So far,
to
peoplehave
A fourth
trading
with
the
major
control their
emotional
cited
you've
impediments
problem
as
poor risk attitudes, stress, and conflict
success. Are there any other major problems
markets?
is that many people allow their
In fact, most trading
trading.
in some
control
problems
emotions
appear
manner. I know of at least ten
to
to involve
methods
of helping
An easy method that
can adopt
states.
people
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
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
Dr.
Van K. 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
most
with a trading
people
system
continue
to apply their
method
normal
decisions to the signals given to them by their trading
of course, that doesn't
work.
The best method that I've
of making
And,
dealing
them
circuit
long,
ineffective
through
a process
with
decision-making
Do
if they
traders
learn to eliminate negative emotions?
emotions are the
that negative
assumes
that
Well,
cause
of
trading
a symptom of the basic problem.
In most
even necessary
to solve specificproblemsto
it's
cases, I don't believe
have to teach people to do things
in an
produce
success\342\200\224you
simply
problems. I think
manner.
effective
are just
they
The
teaching
process, however, involves working
with
that.
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
As a nontrading example, most martial
you can duplicatetheir 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
son (who was ten at the time) how to do it. That's the power behind
modeling.
What happens with
people
competent.
superior
because they
traders
have
better because of
better
Better emotionalcontrol,
but
keener
analytical
skills,
or
I think
that both of those factors
are
So
does it take to duplicate
what
There
mental
are
three
states,
tradersuse those
successfultrading?
primary factors involved in duplicating
and mental strategies. If you duplicate
three
factors
for every aspect of the
success\342\200\224beliefs,
way the best
task, then
trading
the
well,
are
unconsciously
they do them
at driving
who
someone
competent tries to explain
someone else, much of what is important is left out. Thus, my focus
and help people install
those
to discover the missing
pieces.
pieces
is unconsciously
he
what
talk about the first factor: beliefs.How
to trading success?
Let's
are
or she
beliefs
is doing to
is
important
Let me give
from another modeling project.The Army
you an example
in the U.S. They
the rifle skills of the two best sharpshooters
modeled
were then
able
a training
to develop
class
for Army
recruits
four to two
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
about shooting
while
beliefs was particularly
revealing.
two top shooters, for example,believed:
\342\200\242
well
\342\200\242
Hunting
is fun.
\342\200\242
Mental
rehearsal
\342\200\242
If I
overemphasized.
means
which
most people are unconsciouslycompetent
a car. You don't even think
about
it when you do it. When
Shooting
control?
emotional
is that they
experts
example,
The
Are
most
They do things
For
automatically.
most people can be successful
that
believe
you
too
is a little
process
421
K. Tharp
arts
problems is to short
called anchoring.That
involved to explainhere.
system.
found of
Dr. Van
is important for my survival.
is important to successful performance.
miss a shot, it has
something
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 the
two
top shooters,
Dr. Van
422
hit the center of the
Dr. Van
K. Tharp
eye on each shot (even though
you didn't
get
whereas
the second best shooter believed that
it
bull's
extra points for that),
only important to hit the bull's eye. Can you understand
why one
was better than the other just from their beliefs?
with the beliefs of new
Now, contrast the beliefs of top shooters
recruitscoming
into the Army. The latter
believe:
might
was
\342\200\242
Guns
shoot this weapon too many
\342\200\242
If
they
miss the target,
\342\200\242
If
they
I think,
on beliefs
just
shooters
interviews
\342\200\242
is NOT
\342\200\242
It is
OK to lose in
Money
Trading
\342\200\242
Mental
won
They've
the
In contrast,
that
in
working
with
top
it becomes
In addition,
top
you
five
critical
Most people
of the primary
have
think
other
start.
beliefs,
I think
reasons
they
these
five
to make
a
lose. Because
much easier to follow those two
and
golden
extensive
rules.
planning,
mind
all the trial and error in their
top traders have alreadygone through
before they begin. As a result, they
in the
know
they are going to win
the little setbacks much easier to deal with.
long run, and that makes
rehearsal
would win. At this point,
they
they had both the
commitment necessary to producesuccess.In
had the entire constellation of beliefsI just described.
As
the belief that
and the
also
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
a result,
I believethat
there
are three
and misplaced
properly
tested,
justified
confidence
then
your
comes
confidence
is probably
with an extensive commitment
misplaced. Third,
to being
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
If you are really committed, then not only are you certain that you
are doing the right thing, but somehow events just seemto occur to help
then
you. If you are really committed to being a trader,
you probably
I'm
have an understanding
at some
level of what
about. You
talking
even
understand
that
that
those
events
probably
help you might be big
losses. If you are not committed, on the other hand, then you are
\"I don't understand what
is saying. I'm committed,
probably saying,
Tharp
but
events
have not been helping me.\"
certainly
successful
approach trading
worked with began their careers with an
They developedand refined models of how to
rehearsed
what they wanted to do extensivelyuntil
of the markets.
confidence
trouble taking losses and letting
profits
of trading as a game
and play by certain
because of mental
had
justified and misplaced confidence?
that I've
traders
extensivestudy
addition, they
believe:
top traders
the game before they
they
when
The
between
distinguish
confidence
markets.
most
money is soimportant,
rules, then
top
is important for success.
important.
lot of money, and that is one
run.
trader
they
the
why
the raw recruits.
I find
there are a lot more than
are among the
to understand
important.
rehearsal
\342\200\242
expert
trade. Theymentally
is a game.
\342\200\242
Although
is misaligned.
of these beliefs confirmedin
book. Generally,
in your
begin
might go deaf.
they
of my findings
some
some
find
can
times,
the gun
means
than
better
explain
traders. You might
it
alone, you
were so much
Now, let me
You mentioned that winners
know they've won the game before they
start.
I
can
seehow
suchconfidence
would
be
easily
Although
of this
the
beneficial for
the established
impact
winning trader, might
trait actually be reversedfor the novice trader? For example, in your
week
on skis, confidence about your ability to go down the
first
not be such a great quality.
How
does the less
expert
slope
might
they kill people.
are evil;
423
K. Tharp
as
a trader.
Dr. Van
424
you
Dr. Van
425
K. Tharp
states\"
as the
second critical factor
notice how other people walk. Duplicatea dozen
explain
what
you mean by that?
yourself and
you mentioned \"mental
Earlier,
in modeling success.Could
K. Tharp
I'm not saying
If you
of
ask
two
to list their
people
types\342\200\224problems
don't
problems,
and mental state control
own
they don't own consist of blaming
Problems
problems.
trading
they
or investment
they
the
are
markets,
insider
floor traders or locals,blaming
trading,
blaming their
a natural
We
have
for
what
their
broker, or blaming
goes wrong.
system
for
what
other
than ourselves
happens.
tendency to blame something
Society
promotes it. For example,the recent media coverage of program
in the stock
lost
that investors who
money
implies
trading
virtually
rather than because of any fault
of this activity,
market
did so because
of their own. Yet, when
you
something other than yourself,
you blame
it was the result of something
because
can continue to repeat the mistake
blaming
control.
beyond 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
too
impatient
with the markets.
think they
will
happen.
Once you
state problems.
These are just a few examplesof mental
it because
this
about
can
do
a
mental
state
something
problem, you
identify
one
mentioned
how
I've
control.
sort of problem is within
already
your
use
mental
body
posture,
state. To try
one's
breathing, and muscle controlto manipulate
and
mall
into
a
out for yourself, go
this
shopping
state
mental
Well,
are in
simple
suppose you
example,
are
chair. Walk away about four
chair. Noticeyour
most
I
call discipline.
people
that they can use right
For
procedure
away.
at your desk and you become
aware that you
state that you
a mental
is what
manipulation
teach peoplea very
would
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
imagine
you
you
would
like. When you can see that
sit down in the chair again
clearly,
and
assume
the position that you just imagined.
That exercise works for
almost any situation
as it involves several important
posture,
how
posture,
principles\342\200\224changing
your
body
and imagining
a more
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.
you provide some
examples?
People
about what
their
can control
someone
how
mental state?
To
optimistic
losers
not.
are
Can you give a practicalexampleof
at the markets.
\342\200\242
I'm
too
your mental state is the magic
of the answer. But when
you admit
come a long way. The
yourself,
you've
are
for
the
results
you
responsible
you get is the key to
successful
Winners
know
are
investing.
they
responsiblefor their results;
at the wrong
afraid
controlling
It's just part
realization
that
\342\200\242
I'm
time.
that
success.
trading
one.
each
that the answer is within
\342\200\242
I
get angry
can
solution to
for
so walks
or
how your mental state changeswith
notice
strategies,
you have to understand
same modalities as their five
understand
how
in the
think
of visual
senses,
people
think.
that is, in
terms
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.
elements,
strategy
for
and
but
the
way
is really the
Rather
beyond the
than
scope
in which the
sequence
explain
of this
elements
in which
some
are put
together.
tastes and
alphabet
It's
A
is
not the
mental
you think.
a complex topic in detail,
I think is
which
interview, let me give you two examples. First,
Dr. Van
426
that you
K. Tharp
system that gives you specific signals.
or
as a particular chart pattern
Since most signals
visual,
that
on your computer, imagine
certain signals
system gives you visual
your
signals.Now, try on the following strategy:
imagine
a trading
have
such
are
\342\200\242
See the
signal.
\342\200\242
yourself
\342\200\242
Feel
bad
Could you
it is familiar.
that
Recognize
\342\200\242
Tell
what might go wrong
trade
effectively
\342\200\242
See the
using that strategy? Would you even take
if you used the following strategy?
signal.
\342\200\242
it is familiar.
that
Recognize
Could you
take it.
about it.
the signal? Probably not! What
\342\200\242
Feel
if you
strategies are quite
the two
that signal? Probably. So even
though
of
they lead to very different results in terms
similar,
trading. If you are trading a system, you need a simple strategy
last one in order to use it effectively.
Two of the top traders that
you
success have
different
completely
used
in your
trading
like
the
research in modeling
styles. One is very
more
intuitive
the other uses a much
while
their
Could you contrast their differencesand compare
mechanical,
approach.
similarities?
because
they are extensive. In
similarities between two excellenttraders
those
can begin to assume that
then
you
let me talk about their
fact,
you find extensive
First,
when
similarities,
so different,
for example,
Both
essential to successful trading.
are
similarities
traders,
research
did
extensive
and
markets
work
the
for
how
developed models
seem
who
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
test
those
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
picture.
The computer
is easy
for him.
does everything,
so at that
point, decision making
in contrast, has developed a model of how he
trader,
than
a model of how to trade
markets operate, rather
He
also
believes
that
the
markets
are constantly
successfully.
evolving and
it is more important to keep up with
that
in
the market than to
changes
test his models by developing
an algorithm
to computerize them. He
trades
from
of what
his expectations
the markets
will do, which
are
visualizations.
But I think
that he tends to convert his visualizations into
but they are difficult
feelings.
Feelings
actually are a mode of thinking,
to communicate
to others 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
uncomfortable
he has proven his work by computerizing
until
it.
thinks
from
trade
K. Tharp
The intuitive
about it.
good
Dr. Van
What
are the most difficult
I think
there
problems
to solve?
models.
to trading.
two difficult
are
not
People
going
are only
problems.
One
is lack of commitment
to do what I tell them
are committed to becominga good trader,
so I don't
to do
unless
they
see many noncom-
Dr. Van
428
mitted
traders. It's only
occasionally,
that
I see
traders with
to remain
a little
consultation,
wanted
of accomplishing that,
of
seeing
noncommitted
second
The
most
boy,
was
and
a classic
I do
when
this
a free or reduced-rate
of problem.
sort
K. Tharp
was trying to use trading
The man
as
who
a means
example. I don't make the mistake
traders too often.
situation is the
difficult
trader
who
does not own
to repeat his problems because
his problems. This personcan continue
see these people.
don't
he never gets at the source. Once again, I usually
When people come to me, they realize that they produce their own
although, to some extent, everyonehas problems that they
problems,
don't
own\342\200\224even
my
into
debt.
At that point, I refer them
to Gamblers
Anonymous
his compulsiveness
working
with
together.
The
from the
markets
into
working
429
In a sense, I felt that
him.
we had only started
working
more I thought about it, the more the question kept
into
my mind: \"What if we pushed this to the limits? What is he
So the idea of the super-trader
capableof accomplishing?\"
was
program
born from thosethoughts.
I called
him up and suggested the idea to him.
Naturally, he was all for it.
popping
About
four of my
program.
a regular basis (usually
now graduated to the super-trader
to work with these people
have
clients
It simply means that
I continue
idea is to stretch
The
semiannually).
on
their
for that, but I have
Many people aren't ready
who are. Who knows, in three or four years,
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.
limits.
the
to
performance
my
clients
or
I have had one compulsive trader
to some localsourceforhelp. However,
among my clients. He's now in my super-trader program. I've simply
channeled
K. Tharp
enough among
clients.
Among the people who come to see me, I think the most difficult
the
crave
is
the compulsive gambler. Sincethese peopletypically
type
until
to
want
are
not
action of the markets,
they are
my help
likely
they
heavily
Dr. Van
on
I sometimeshave
involve
which
dreams
are rather
these
direction. Although
percentage of the time.Is this
impending
infrequent,
they
market
prove
a high
right
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
that it's quite
because
people tell me that all the time,
and intuitive
especially top traders. For example,both the mechanical
super-traders that we talked about earlier expressed that they had dreams
about the market
that were amazingly accurate. But most traders
say that
I imagine
such dreamsare infrequent
regularly. This phenomenon
might
imagine\342\200\224in
interpret
their
dreams,
must admit that
very
direction
of your
super-trader
program.
one trader
called and
Eve one year, when that
It all began on Christmas
I
had
finished
months
since
told me that he had made $650,000 in the two
so that they
enough
may
form.
symbolic
it interests
symbolic
on them
not trade
But most people do not
so they miss the
although
could
occur more frequently
even
predictions.
one
than
bother
to
However,
me, I have not investigated this
I
area
extensively.
I know of lots of
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,
common
people
comes from
of genius
their
dreams.
don't ask me to explainit. I don'tunderstand
it\342\200\224YET!
Dr. Van K. Tharp
430
that the reason you have not tried trading
again is that you
with your objectivity in dealing
with
perceive that it would interfere
about successful
have learned
you
your clients. Yet, given all that
trading during the past five years, I imagine there must be some
this conflict?
handle
What
to try it again. How do you
temptation
do you envision as the long-termresolution?
I assume
There
about
two reasons
are
I don't trade.The
objectivity
conflicting positions,then
I may
is the reason you
someone
mentioned
other
they
writing,
people,
giving talks, and so on. I'm very happy doing that. It is also a sixty-hour
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
myself.
constantly
I'm investing
work
off forme.
in
myself
and
in my business
right
now.
my skills and knowledge, and that
I dilute that effort? Perhaps sometime
I
at improving
is paying
should
in the
Why
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
A Personal Experience
and I have
trade
not be very objective about what
is that I am fully
however,
reason,
An equally important
to doing
what I am doing. I love helping
are doing.
committed
first
with clients. If I'm helping
Trade
The
In the
the interviews for this
of conducting
course
realize that
one of my primary
self-discovery.Although
(substantially
I had
occasions),
extent
of my
as the
fact
I had
book,
project
about
a probing
Ed Seykota.This
trips
to
was a quest for
winnings
and
trading,
as well
anticipated
major
were small potatoes comparedto
for this book, on one evening,
my trading by Dr. Van Tharp,
conversation
about my trading
back-to-back
Given the
my trading.
knowledge and experience about markets
that on numerous occasions I had
correctly
about
I came
been a net profitable trader over the years
a small initial
stake
on two separate
multiplying
a definite sense of failure
In one of my
at length
entire
I have
price moves, I felt that my
I should have made.
what
decide
motives for the
experience
I was
interviewed
and the very next evening,
with
the very perceptive
caused me to focus intensely
that had prevented me from reaching
what I perceived to be
as a trader.
As
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
my
true
potential
a result
The
432
that subsequent
corrections usually
refusing to chase the
market,
short
fell
I ended
Trade
of my reentry points and,
the rest of the price
up 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
that precious metal prices were ready
impression
away with the distinct
the foreign
to move higher, even though
currency markets appeared
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
metals and short foreign
in the same
move
direction, the
markets
these
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
precious
long
attractive.
first opportunity.
at my
a quote
machine capable of generating
morning, I found
I
various
First,
and sat down to evaluate
price relationships.
next
The
price charts
looked
decided
at the
interrelationships
that silver
reviewed
the
was my
interrelationships
between
preferred
between
silver, gold, and platinum
buy
among
and
the metals. Then I
the various foreign currencies
that the Swiss franc appeared to be the weakest
currency.
of the
charts
reviewed
I
then
made
these
two
determinations,
Having
from
ten years
time
for
various
ratio
franc
spectrums,ranging
silver/Swiss
month.
to one
that we were at the brink of
led me to the conclusion
This
analysis
of silver relative to the Swiss franc.
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,
and
decided
The Trade
of my
tion
433
intended
trade since my
about
realization
it the previous
on that
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
morning.Even
seemed to reachits peak
and began retreating. The ratio pulledback
two
during
days. As it turned out, I had managed to
implement the
trade at the exact worst possible moment
in time
since the
inception of my idea. However, the silver/Swiss franc price ratio
and a few days later I was well ahead.
recovered,
quickly
At this point, I thought
about
my recent realization regarding
my
continued
failure to adequately profit
from
major price moves. I decided
to maintain
for
my position and, moreover, selecteda reaction
point
the
The
correction
came
about
a
week
I
later
and
doubling up
position.
followed my game plan. My timing
as
the
trade
once again
proved
good,
rebounded in my favor\342\200\224this time with double the initial position.
Given
the long six
my account size (approximately $70,000 at the time),
silver/short two Swiss franc position was about twice as large as the one
I normally
would have held. My efforts
to correct my aforementioned
flaw
seemed
to be paying
as the trade raced in my favor
off,
trading
two weeks.
Within a month
of putting
on the trade,
during the following
account
was
over
30
my
up
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.
the next
further
examination of the
A cursory
prudent
to
reach
to take
a decision.
new job, while
little time
doing the
at least partial
at the
and energy
necessary
I should
profits.
However, the
suggested it might be
have done more analysis
of having undertaken a
book, left me with
very
charts
price
combination
same time writing
this
to focus on other areas\342\200\224trading included.
Instead
of
to stay with the trade.
work, I made a snap judgment
434
The trade
now moved swiftly
against
me, and within
The
Trade
a week, I had
given
a significant portion of my earlier
gains.
a week earlier, I had rationalized
that my substantial
Although
of a comfort cushion in the event of a
profits would give me enough
back
reaction,
now
that
such a reaction had occurred,I found
misjudged my
comfort
level.
Suddenly,
that I had seriously
I was concerned that I might
ride
the trade into a loss. I
give back all my profits, and possibly even
decide
to blow out of the trade or stay with it as
whether
could not
initially
planned.
That
a developer
to a friend of mine, who is
night I had a dream.I was talking
of software
for the analysis of futures
and options
markets,
but not a trader. In my dream, he had begun trading.
about trading
and my current dilemma regarding the
We
were
silver/Swiss
talking
franc
position.
since.\"
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 of him,
ending
435
Trade
ing the sales of my
book,
per copy sold, and the total hours
He then scribbled various calculationson
royalties
I
had spent writing
he
\"Here,\"
pad. He arrived at a final figure of $18.50 per hour.
yellow
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
but remember this was a dream.)
overinflated,
probably wildly
after
It was no coincidence that this dream occurred the night
with his
interview
Schwartz
of
the
section
the
dealing
Marty
editing
that
I
realized
the
markets.
on
his
homework
in
daily
diligence doing
to
do
have
there are no shortcuts.If you want to be a good trader,
you
the
your
have
book.
markets every day. If
to make time. The costs for straying
work
on the
of lost
there
from
is not
enough time, you
this daily discipline,
well as losses,
a
can be very
in
as
profit opportunities
out was: If you
my subconscious seemed to be crying
time
are going to be seriousabout
trading,
you have to reestablish your
terms
My friend commented on my predicament,
gets what
\"Everybody
want
out of the markets.\" I replied,\"You
sound
they
just like Ed
he did
Seykota.\" This soundeda bit odd to me, since as far as I knew,
not even know Seykota. To my surprise,
he answered,
\"I have
been
for a while and I have been winning in my trading ever
talking to Ed Seykota
Hehad
The
substantial.
The
priorities.
message
Postscript
Dreams and Trading
The
dreams
between
relationship
Readers may
look
up Seykota's
is a fascinating
and trading
subject.
and Tharp's commentson this matter.
in which
this topic was prominently
trader
decided
to rescindhis approval
for use
the
instance,
of our conversation in the book. I was somewhat puzzled by his decision,
was another
There
interview
In that
discussed.
sincethe
chapter
was
have
found
so offensive
possibly
\"Absolutely
nothing,\"
human.\"
It turned
in
any
complimentary.
as to back out
and that he was adamantly
Even the offer of anonymity
book.
I did,however,
manage
to get
conversation have
been
In 1980, the
year
when
night
say, \"Hey
Jerry,
where
\"$4.07.\"
cents? Are
my entire
you
me sound almost
in a
inclusion
opposed
failed
to his appearance
to change
his decision.
dream-related
in the following
references
corn set its record high,
I had the following
now?\"
made
his
changed.)
One
limit.
you
I asked.
his permission to use the
of the interview. (The name
portion
could
\"What
completely?\"
\"In
he replied.
fact,
you
out that he was upset about
book
recently
published
basically
I was
dream. I'm talking
is corn going to?\"
\"To
$4.15.\"
long the position
and I
to myself
\"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
next
The
selling.
the market opened up a little higher, and I started
morning,
moved
a little higher, and I sold more
The
market
The
heavily.
I thought
the floor broker
up some more.For a minute,
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
market
moved
saying
And was that the top of
the
corn
good-bye.
market?
It might
have
gone up another day, but that was just about the
it started falling,
I could
never have unloaded a position
of
high.
Once
my size.
There
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
odds
more
As
in your favor.
I interpret
it, the dream is the
means
by which
our subconscious
penetratesthe barriers we sometimes erect in accepting
the true analysis
of a market.
For example,
if I am bullish
and not in a market, I might
it is
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
that
Word
Final
by
the
to
technical
time
the
success.
holy grail to trading
\"market
wizards\" cover the entire
is no
The
purely
from
spectrum
in between.
fundamental\342\200\224and
everything
they typically hold a trade
styles of the traders are very
minutes
from
ranges
employed
purely
of
The length
methodologies
to years. Although
denominators
different,
many
common
had a driving
desire
to become
were evident:
1. All
interviewed
those
traders\342\200\224in
their
2.
cases,
many
goal.
All reflected
confidence that
run. Almost invariably,
and safest investment
they
for
3. Each trader had found
remained
true
to that
word most frequently
4.
overcoming
successful
significant obstacles to reach
The top traders
substantial
amount
they
could
continue
their
to win
over
their own trading
considered
the long
as the
best
money.
a methodology
that worked for him and
was the
that discipline
approach. It is significant
mentioned.
take their
of their
trading
very
seriously;
most devote a
waking hours to market analysis and trading
strategy.
5.
Rigid risk control is one of the key elements
of virtually all those interviewed.
in the trading
strategy
440
6.
Final
In a variety
of ways, many
having the patience to wait
present
7.
of
the traders
stressed the
for
the right
trading opportunity
Word
of
importance
to
itself.
The importance
emphasized
8. All 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
in recent
that has received widespreadpublicity
years is
of financial
never in the history
markets has
program trading.
Perhaps
One
subject
there been more criticism
understood. I
to
opposed
would
program
source of confusion
describe both
encompassing
a trading approach that was less
about
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
the
various
computer-supported
trading
strategies
(for example,
insurance).
portfolio
trading represents
Program
market is bought
against
an equal
in which one
a classicarbitrage
activity
short sale in a closely related market
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
tends
that
indicates
to reduce
between related markets
arbitrage
volatility,
relationship
and program trading
is questionable
at best.
between
the
increased
volatility
Portfolio insurancerefers to the systematic sale of stockindex
as the value of a stock
in order to reduce risk
declines
portfolio
Once
the net long exposure is increasedbacktoward
exposure.
reduced,
full position as the representative
stock index price increases. The
theory
futures
portfolio
underlying
insurance
presumes
smoothly. When prices witnessan
October
19,
sell levels, triggering
far below the theoretical
underlying
a greater
span
question that
trading, as
an
avalanche
levels.
Although
defined
never
be answered.
tremendous
confusion
restrictions
regarding
severely impededthis
severely
delayed
Basics*
insurance
executed
have
insurance.
(It is doubtful
the
openings
that
crash
This
is a
program
of the week of
of individual
stocks,
related to prevailing price levels, and
exchange
the use of the automated
order
entry systems
activity.)
the
Options\342\200\224Understanding
be argued that
reasonably
a similar
price decline over
above, played much of a role in
October 19, sincethe
were
portfolio insurance may
forces would have resultedin
of days in the absence of
portfolio
can
move
prices
portfolio
of sell orders which
2
Appendix
huge move, the results of the
This occurred on
theory.
the decline on October19,it could
accelerated
the
abrupt,
market
differ substantially from the
1987, when prices gapped beyondthreshold
may
strategy
that
a
of a
basic
types of options: calls and puts. The purchase
with the right\342\200\224but not the obligation\342\200\224
call option provides the buyer
the underlying item at a specified
to purchase
price,called the strike or
date. Aput
the
and
time
to
at
exercise price, any
expiration
including
up
There are two
option provides the buyer with the right\342\200\224but not the obligation\342\200\224to sell
item at the strike price at any time prior to expiration.
the underlying
a put
while
a put is a bearish trade,
that buying
selling
(Note,therefore,
As
an
The price of an option is calleda premium.
is a bullish
trade.)
130 call gives the purchaser the right
an IBM April
of
an
option,
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
possible
will be equal to the dollar amount
loss
option.
This
expirationif
the
example,
if
option
would
loss would
of the
expire worthless.
from
1984).
market
130
If at expiration,the
Jack D. Schwager, A CompleteGuide
& Sons, New Yoik,NY,
premium
paid for the
on an option held until
strike price was above the prevailing
the
IBM was trading at $125 when
*Adapted
Wiley
maximum
occur
price.
For
expired, the
of the underly-
option
price
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.
Roughly
speaking, the option buyer accepts a large
for a small probability
of a large gain,
of a small loss in return
445
2
Appendix
the option seller accepts a small
whereas
for a large probability
exchange
of
of a large loss in
efficient market,
In
an
gain.
consistent
option seller should
probability
a small
option buyer nor the
over the long run.
have any significant
advantage
value
intrinsic
consists of two components:
The
option premium
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
the consistent
neither
premium
market
current
option.
The intrinsic
price.
if the premium were lessthan
Because
Why?
trader could buy
market
resulting
and
market
said
and puts with
with
a strike price closest to
has
out-of-the-money
date.
calls with strike prices below
prices above the market price) are
no intrinsic value are called
have
(i.e.,
the
are called at-the-moneyoptions.
value equal to zero, will
that the market price will
expiration
strike
Options
options.
price
An
for an
intrinsic
costs).
value
in-the-money. Options that
out-of-the-money
market
the
position,
price
to be
price
value, a
the
offset
and
the option
exercise
immediately
the
that
a
net
(assuming
gain
thereby realizing
trader covers at least transaction
that have intrinsic
Options
the
value servesas a floor
which by definition
option,
still have some value because of the
move
An in-the-money
an intrinsic
possibility
the strike price prior to the
option will have a value greater than
beyond
the
value because a positionin the option will be preferred to a
intrinsic
market. Why? Because both the option and the
position in the underlying
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
value
are:
(1) Relationship
options
of-the-money
the market
expiration.
price will
Deeply
between the
will have little
move
in-the-money
to the
and market
strike
time
value
out-
price\342\200\224Deeply
since it is unlikely
that
strike price\342\200\224or beyond\342\200\224prior
have little time value, because
to
options
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
Appendix
risk is limited is not
that
far
worth
(2) Time
a longer
until
remaining
until expiration,
the
very
much, because the strike price isso
market price.
the prevailing
from
2
of the
greater
time
more
expiration\342\200\224The
the value
This
option.
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.
volatility
Although
determination
of option
volatility
of a market
contrast,
the
time
is an extremely important
premium
values,
it
should
is never preciselyknown
remaining
factor
in the
that the future
after the fact. (In
be stressed
until
until expiration and the relationship
between
price and the strike price can be exactly specifiedat
Thus, volatility must always be estimatedon the basis of
The future volatility estimate implied by market
historical volatility
data.
market
the
current
any
juncture.)
prices
historical
be higher or lower than
premiums), which
may
is
called
the
volatility.
volatility,
implied
(i.e., option
the