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If I wanted to become a tramp, I would seek information and advice from the most successful tramp I could find. If I wanted to become a failure, I would seek advice from men who had never succeeded. If I wanted to succeed in all things, I would look around me for those who are succeeding and do as they have done.

—Joseph Marshall Wade (as quoted in A Treasury of Wall Street Wisdom edited by Harry D. Schultz and Samson Coslow)

These are but a sampling of the interviews contained in this book. In his own way, each of the traders interviewed has achieved incredible success.

What sets these traders apart? Most people think that winning in the markets has something to do with finding the secret formula. The truth is that any common denominator among the traders I interviewed had more to do with attitude than approach. Some of the traders use fundamental analysis exclusively, others employ only technical analysis, and still others combine the two. Some traders operate on a time horizon measured in hours or even minutes, while others typically implement positions that they intend to hold for months or even years. Although the trading methodologies varied widely, the forthcoming interviews reveal certain important 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 actually become a multimillionaire. Of course, only a handful of individuals (such as those interviewed here) succeed in turning this feat, but at least the opportunity exists.

While I hardly expect all readers of this book to transform themselves into super-traders—the world just doesn’t work that way—I believe that these thought-provoking interviews will help most serious and open-minded readers improve their personal trading performance. It may even help a select few become super-traders.

First and foremost, I would like to thank Stephen Chronowitz, who pored over every chapter in this book and provided a multitude of helpful suggestions and editing changes. I am indebted to Steve for both the quantity (hours) and quality of his input. I truly believe that whatever the merits of this work, it has benefited significantly from his contributions.

I am grateful to my wife, Jo Ann, not only for enduring nine months as a “book widow,” but also for being a valuable sounding board—a role she performed with brutal honesty. Sample: “This is the worst thing you ever wrote!” (Needless to say, that item was excised from the book.) Jo Ann possesses common sense in abundance, and I usually followed her advice unquestioningly.

Of course, I would like to express my thanks to all the traders who agreed to be interviewed, without whom there would be no book. By and large, these traders neither need nor seek publicity, as they trade only for their own accounts or are already managing all the money they wish to. In many cases, their motives for participating were altruistic. For example, as one trader expressed it, “When I was starting out, I found biographies and interviews of successful traders particularly helpful, and I would like to play a similar role in helping new traders.”

I wish to express my sincere appreciation to Elaine Crocker for her friendly persuasion, which made some of the chapters in this book possible. For advice, leads, and other assorted favors, I would like to thank Courtney Smith, Norm Zadeh, Susan Abbott, Bruce Babcock, Martin Presler, Chuck Carlson, Leigh Stevens, Brian Gelber, Michael Marcus, and William Rafter. Finally, I would like to thank three traders who were gracious enough to grant me lengthy interviews that were not incorporated into this book: Irv Kessler, Doug Redmond, and Martin Presler (the former two because, in retrospect, I considered my line of questioning too esoteric and technical; the latter because publication deadlines did not permit time for needed follow-up interviews and editing).

The name of the book was The Big Board. . . . It was about an Earthling man and woman who were kidnapped by extraterrestrials. They were put on display in a zoo on a planet called Zircon-212.

These fictitious people in the zoo had a big board supposedly showing stock market quotations and commodity prices along one wall of their habitat, and a news ticker, and a telephone that was supposedly connected to a brokerage on Earth. The creatures on Zircon-212 told their captives that they had invested a million dollars for them back on Earth, and that it was up to the captives to manage it so that they would be fabulously wealthy when they were returned to Earth.

The telephone and the big board and the ticker were all fakes, of course. They were simply stimulants to make the Earthlings perform vividly for the crowds at the zoo—to make them jump up and down and cheer, or gloat, or sulk, or tear their hair, to be scared shitless or to feel as contented as babies in their mothers’ arms.

The Earthlings did very well on paper. That was part of the rigging, of course. And religion got mixed up in it, too. The news ticker reminded them that the President of the United States had declared National Prayer Week, and that everybody should pray. The Earthlings had had a bad week on the market before that. They had lost a small fortune in olive oil futures. So they gave praying a whirl. It worked. Olive oil went up.

If the random walk theorists are correct, then Earthbound traders are suffering from the same delusions as the zoo inhabitants of Kilgore Trout’s novel. (Kilgore Trout is the ubiquitous science fiction writer in Kurt Vonnegut’s novels.) Whereas the prisoners on Zircon-212 thought their decisions were being based on actual price quotes—they were not—real-life traders believe they can beat the market by their acumen or skill. If markets are truly efficient and random in every time span, then these traders are attributing their success or failure to their own skills or shortcomings, when in reality it is all a matter of luck.

After interviewing the traders for this book, it is hard to believe this view of the world. One comes away with a strong belief that it is highly unlikely that some traders can win with such consistency over vast 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 consequence of the laws of probability. I leave it for the mathematicians 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 that, over the long run, the question of who wins and who loses is determined by skill, not luck. I, too, share this conviction.

Right out of graduate school, I landed a job as a commodity research analyst. I was pleasantly surprised to find that my economic and statistical analysis correctly predicted a number of major commodity price moves. It was not long thereafter that the thought of trading came to mind. The only problem was that my department generally did not permit analysts to trade. I discussed my frustration over this situation with Michael Marcus (first interview), with whom I became friends while interviewing for the research position he was vacating. Michael said, “You know, I had the same problem when I worked there. You should do what I did—open an account at another firm.” He introduced me to a broker at his new firm, who was willing to open the account.

At the time, I was earning less than the department secretary, so I didn’t exactly have much risk capital. I had my brother open a $2,000 account for which I acted as an advisor. Since the account had to be kept secret, I could not call in any orders from my desk. Every time I wanted to initiate or liquidate a position, I had to take the elevator to the building’s basement to use the public phone. (Marcus’ solution to the same problem is discussed in his interview.) The worst part of the situation was not merely the delays in order entry, which were often nerve-wracking, but the fact that I had to be very circumspect about the number of times I left my desk. Sometimes, I would decide to delay an order until the following morning in order to avoid creating any suspicion.

I don’t remember any specifics about my first few trades. All I 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 impression. I had done a very detailed analysis of the cotton market throughout the entire post–World War II period. I discovered that because of a variety of government support programs, only two seasons since 1953 could truly be termed free markets [markets in which prices were determined by supply and demand rather than the prevailing government program]. I correctly concluded that only these two seasons could be used in forecasting prices. Unfortunately, I failed to reach the more significant conclusion that existing data were insufficient to permit a meaningful market analysis. Based on a comparison with these two seasons, I inferred that cotton prices, which were then trading at 25 cents per pound, would move higher, but peak around 32–33 cents.

The initial part of the forecast proved correct as cotton prices edged higher over a period of months. Then the advance accelerated and cotton jumped from 28 to 31 cents in a single week. This latest rally was attributed to some news I considered rather unimportant. “Close enough to my projected top,” I thought, and I decided to go short. Thereafter, the market moved slightly higher and then quickly broke back to the 29-cent level. This seemed perfectly natural to me, as I expected markets to conform to my analysis. My profits and elation were short-lived, however, as cotton prices soon rebounded to new highs and then moved unrelentingly higher: 32 cents, 33 cents, 34 cents, 35 cents. Finally, with my account equity wiped out, I was forced to liquidate the position. Not having much money in those days may have been one of my luckiest breaks, since cotton eventually soared to an incredible level of 99 cents—more than double the century’s previous high price!

That trade knocked me out of the box for a while. Over the next few years, I again tried my hand at trading a couple of times. In each instance, I started with not much more than $2,000 and eventually wiped out because of a single large loss. My only consolation was that the amounts I lost were relatively small.

Two things finally broke this pattern of failure. First, I met Steve Chronowitz. At the time, I was the commodity research director at Hornblower & Weeks, and I hired Steve to fill a slot as the department’s precious metals analyst. Steve and I shared the same office, and we quickly became good friends. In contrast to myself, a pure fundamental analyst, Steve’s approach to the markets was strictly technical. (The fundamental analyst uses economic data to forecast prices, while the technical analyst employs internal market data—such as price, volume, and sentiment—to project prices.)

Until that time, I had viewed technical analysis with great skepticism. I tended to doubt that anything as simple as chart reading could be of any value. Working closely with Steve, however, I began to notice that his market calls were often right. Eventually, I became convinced that my initial assessment of technical analysis was wrong. I realized that, at least for myself, fundamental analysis alone was insufficient for successful trading; I also needed to incorporate technical analysis for the timing of trades.

The second key element that finally put me into the winner’s column was the realization that risk control was absolutely essential to successful trading. I decided that I would never again allow myself to lose everything on a single trade—no matter how convinced I was of my market view.

Ironically, the trade that I consider my turning point and one of my best trades ever was actually a loss. At the time, the Deutsche mark had carved out a lengthy trading range following an extended decline. Based on my market analysis, I believed that the Deutsche mark was forming an important price base. I went long within the consolidation, simultaneously placing a good-till-cancelled stop order just below the recent low. I reasoned that if I was right, the market should not fall to new lows. Several days 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 stopped out, the market plummeted like a stone. In the past, this type of trade would have wiped me out; instead, I suffered only a minor loss.

Not long thereafter, I became bullish on the Japanese yen, which had formed a technically bullish consolidation, providing a meaningful close point to place a protective stop. While I normally implemented only a one-contract position, the fact that I felt reasonably able to define my risk at only 15 ticks per contract—today, I find it hard to believe that I was able to get away with that close a stop—allowed me to put on a three-contract position. The market never looked back. Although I ended up getting out of that position far too early, I held one of the contracts long enough to triple my small account size. That was the start of my success at trading. Over the next few years, the synthesis of technical and fundamental analysis combined with risk control allowed me to build my small stake into well over $100,000.

Then the streak ended. I found myself trading more impulsively, failing to follow the rules I had learned. In retrospect, I believe I had just become too cocky. In particular, I remember a losing trade in soybeans. Instead of taking my loss when the market moved against me, I was so convinced that the decline was a reaction in a bull market that I substantially increased my position. The mistake was compounded by taking this action in front of an important government crop report. The report came out bearish, and my equity took a dramatic decline. In a matter of days, I had surrendered over one-quarter of my cumulative profits.

After cashing in my chips to buy a house and later taking a yearlong sabbatical to write a book,* my savings were sufficiently depleted to defer my reentry into trading for nearly five years. When I began trading again, typical to my usual custom, I started with a small amount: $8,000. Most of this money was lost over the course of a year. I added another $8,000 to the account and, after some further moderate setbacks, eventually scored a few big winning trades. Within about two years, I had once again built my trading account up to over $100,000. I subsequently stalled out, and during the past year, my account equity has fluctuated below this peak.

Although, objectively, my trading has been successful, on an emotional level, I often view it with a sense of failure. Basically, I feel that given my market knowledge and experience, I should have done better. “Why,” I ask myself, “have I been able to multiply a sub-$10,000 account more than tenfold on two occasions, yet unable to expand the equity much beyond that level, let alone by any multiples?”

A desire to find the answers was one of my motivations for writing this book. I wanted to ask those traders who had already succeeded: What are the key elements to your success? What approach do you use in the markets? What trading rules do you adhere to? What were your own early trading experiences? What advice would you give to other traders?

While, on one level, my search for answers was a personal quest to help surpass my own barriers, in a broader sense, I saw myself as Everyman, asking the questions I thought others would ask if given the opportunity.

*Jack D. Schwager, A Complete Guide to the Futures Markets (John Wiley & Sons, New York, NY, 1984).

Part I

Futures and Currencies

Taking the Mystery Out of Futures

Of all the markets discussed in this book, the futures market is probably the one least understood by most investors. It is also one of the fastest growing. Trading volume in futures has expanded more than twentyfold during the past twenty years. In 1988, the dollar value of all futures contracts traded in the U.S. exceeded $10 trillion!* Obviously, there is a lot more than pork belly trading involved here.

Today’s futures markets encompass all of the world’s major market groups: interest rates (e.g., T-bonds), stock indexes (e.g., the S&P 500), currencies (e.g., Japanese yen), precious metals (e.g., gold), energy (e.g., crude oil), and agricultural commodities (e.g., corn). Although the futures markets had their origins in agricultural commodities, this sector now accounts for only about one-fifth of total futures trading. During the past decade, the introduction and spectacular growth of many new contracts has resulted in the financial-type markets (currencies, interest rate instruments, and stock indexes) accounting for approximately 60 percent of all futures trading. (Energy and metal markets account for nearly half of the remaining 40 percent.) Thus, while the term commodities is often used to refer to the futures markets, it has increasingly become a misnomer. Many of the most actively traded futures markets, such as those in the financial instruments, are not truly commodities, while many commodity markets have no corresponding futures markets.

The essence of a futures market is in its name: Trading involves a standardized contract for a commodity, such as gold, or a financial instrument, such as T-bonds, for a future delivery date, as opposed to the present time. For example, if an automobile manufacturer needs copper for current operations, it will buy its materials directly from a producer. If, however, the same manufacturer was concerned that copper prices would be much higher in six months, it could approximately lock in its costs at that time by buying copper futures now. (This offset of future price risk is called a hedge.) If copper prices climbed during the interim, the profit on the futures hedge would approximately offset the higher cost of copper at the time of actual purchase. Of course, if copper prices declined instead, the futures hedge would result in a loss, but the manufacturer would end up buying its copper at lower levels than it was willing to lock in.

While hedgers, such as the above automobile manufacturer, participate in futures markets to reduce the risk of an adverse price move, traders participate in an effort to profit from anticipated price changes. In fact, many traders will prefer the futures markets over their cash counterparts as trading vehicles for a variety of reasons:

1. Standardized contracts—Futures contracts are standardized (in terms of quantity and quality); thus, the trader does not have to find a specific buyer or seller in order to initiate or liquidate a position.

2. Liquidity—All of the major futures markets provide excellent liquidity.

3. Ease of going short—The futures markets allow equal ease of going short as well as long. For example, the short seller in the stock market (who is actually borrowing stock to sell) must wait for an uptick before initiating a position; no such restriction exists in the futures markets.

4. Leverage—The futures markets offer tremendous leverage. Roughly speaking, initial margin requirements are usually equal to 5 to 10 percent of the contract value. (The use of the term margin in the futures market is unfortunate because it leads to tremendous confusion with the concept of margins in stocks. In the futures markets, margins do not imply partial payments, since no actual physical transaction occurs until the expiration date; rather, margins are basically good-faith deposits.) Although high leverage is one of the attributes of futures markets for traders, it should be emphasized that leverage is a two-edged sword. The undisciplined use of leverage is the single most important reason why most traders lose money in the futures markets. In general, futures prices are no more volatile than the underlying cash prices or, for that matter, many stocks. The high-risk reputation of futures is largely a consequence of the leverage factor.

5. Low transaction costs—Futures markets provide very low transaction costs. For example, it is far less expensive for a stock portfolio manager to reduce market exposure by selling the equivalent dollar amount of stock index futures contracts than by selling individual stocks.

6. Ease of offset—A futures position can be offset at any time during market hours, providing prices are not locked at limit-up or limit-down. (Some futures markets specify daily maximum price changes. In cases in which free market forces would normally seek an equilibrium price outside the range of boundaries implied by price limits, the market will simply move to the limit and virtually cease to trade.)

7. Guaranteed by exchange—The futures trader does not have to be concerned about the financial stability of the person on the other side of the trade. All futures transactions are guaranteed by the clearinghouse of the exchange.

Since by their very structure, futures are closely tied to their underlying markets (the activity of arbitrageurs assures that deviations are relatively minor and short lived), price moves in futures will very closely parallel those in the corresponding cash markets. Keeping in mind that the majority of futures trading activity is concentrated in financial instruments, many futures traders are, in reality, traders in stocks, bonds, and currencies. In this context, the comments of futures traders interviewed in the following chapters have direct relevance even to investors who have never ventured beyond stocks and bonds.

*This is a rough but conservative estimate based on 246 million contracts traded and assuming an average contract value well over $40,000. (Excluding short-term interest rate futures, such as Eurodollars, single contract values ranged from about $11,000 for sugar at 10¢/Ib. to $150,000 for the S&P 500 at an index value of 300.)

The Interbank Currency Market Defined

The interbank currency market is a twenty-four-hour market which literally follows the sun around the world, moving from banking centers in the U.S. to Australia, to the Far East, to Europe, and finally back to the U.S. The market exists to fill the need of companies to hedge exchange risk in a world of rapidly fluctuating currency values. For example, if a Japanese electronics manufacturer negotiates an export sale of stereo equipment to the U.S. with payment in dollars to be received six months hence, that manufacturer is vulnerable to a depreciation of the dollar versus the yen during the interim. If the manufacturer wants to assure a fixed price in the local currency (yen) in order to lock in a profit, he can hedge himself by selling the equivalent amount of U.S. dollars in the interbank market for the anticipated date of payment. The banks will quote the manufacturer an exchange rate for the precise amount required, for the specific future date.

Speculators trade in the interbank currency market in an effort to profit from their expectations regarding shifts in exchange rates. For example, a speculator who anticipated a decline in the British pound against the dollar would simply sell forward British pounds. (All transactions in the interbank market are denominated in U.S. dollars.) A speculator who expected the British pound to decline versus the Japanese yen would buy a specific dollar amount of Japanese yen and sell an equivalent dollar amount of British pounds.

Michael Marcus

Blighting Never Strikes Twice

Michael Marcus began his career as a commodity research analyst for a major brokerage house. His near-compulsive attraction to trading led him to abandon his salaried position to pursue full-time trading. After a brief, almost comical, stint as a floor trader, he went to work for Commodities Corporation, a firm that hired professional traders to trade the company’s own funds. Marcus became one of their most successful traders. In a number of years, his profits exceeded the combined total profit of all the other traders. Over a ten-year period, he multiplied his company account by an incredible 2,500-fold!

I first met Marcus the day I joined Reynolds Securities as a futures research analyst. Marcus had accepted a similar job at a competing firm, 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 analysis more persuasive when we disagreed, Marcus ultimately proved right about the direction of the market. Eventually, Marcus accepted a job as a trader, became very successful, and moved out to the West Coast.

When I first conceived the idea for this book, Marcus was high on my list of interview candidates. Marcus’ initial response to my request was agreeable, but not firm. Several weeks later, he declined, as his desire to maintain anonymity dominated his natural inclination to participate in an endeavor he found appealing. (Marcus knew and respected many of the other traders I was interviewing.) I was very disappointed because Marcus is one of the finest traders I have been privileged to know. Fortunately, some additional persuasion by a mutual friend helped change his mind.

When I met Marcus for this interview, it had been seven years since we had last seen each other. The interview was conducted in Marcus’ home, a two-house complex set on a cliff overlooking a private beach in Southern California. You enter the complex through a massive gate (“amazing gate” as described by an assistant who provided me with driving directions) that would probably have a good chance of holding up through a panzer division attack.

On first greeting, Marcus seemed aloof, almost withdrawn. This quiet side of Marcus’ personality makes his description of his short-lived attempt to be a floor trader particularly striking. He became animated, however, as soon as he began talking about his trading experiences. Our conversation focused on his early “roller coaster” years, which he considered to be the most interesting of his career.

I was something of a scholar. In 1969, I graduated from Johns Hopkins, Phi Beta Kappa, near the top of my class. I had a Ph.D. fellowship in psychology at Clark University, and fully expected to live the life of a professor. Through a mutual friend, I met this fellow named John, who claimed he could double my money every two weeks, like clockwork. That sounded very appealing [he laughs]. I don’t think I even asked John how he could do it. It was such an attractive idea that I didn’t want to spoil things by finding out too many facts. I was afraid I would get cold feet.

No, I had never invested in anything, and I was very naive. I hired John, who was a junior at my school, to be my commodity trading advisor at $30 a week. Occasionally, I threw in free potato chips and soda. He had a theory that you could subsist on that diet.

That’s all you paid him? Weren’t there any profit incentives—extra potato chips if he did well?

My first trip to a brokerage house was very, very exciting. I got dressed up, putting on my only suit, and we went to the Reynolds Securities office in Baltimore. It was a big, posh office, suggesting a lot of old money. There was mahogany all over the place and a hushed, reverential tone permeated the office. It was all very impressive.

The focal point was a big commodity board at the front of the office, the kind that clicked the old-fashioned way. It 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, because it was just like watching a horse race.

My first realization that things might become a little scary was when a voice came over the loudspeaker recommending the purchase of soybean meal. I looked at John, expecting to see an expression of confidence and assurance on his face. Instead, he looked at me and asked, “Do you think we should do it?” [he laughs]. It quickly dawned on me that John didn’t know anything at all.

I remember soybean meal was trading quietly: 78.30, 78.40, 78.30, 78.40. We put the order in, and as soon as we got the confirmation back, 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 descending. I guess I had good instincts even then, because I immediately said to John, “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 happened. John asked me whether we should do the trade. I said, “Well all right, let’s try corn.” The outcome was the same.

Did you know anything at all about what you were doing? Had you read anything about commodities or trading?

Right. Our next trade, in wheat, didn’t work either. After that, we went back to corn and that trade worked out better; it took us three days to lose our money. We were measuring success by the number of days it took us to lose.

Yes, although one trade lost almost $200. I was down to about $500 when John came up with an idea that was “going to save the day.” We would buy August pork bellies and sell February pork bellies because the spread was wider than the carrying charges [the total cost of taking delivery in August, storing, and redelivering in February]. He said we couldn’t lose on that trade.

I vaguely understood the idea and agreed to the trade. That was the first time we decided to go out to lunch. All the other times we had been too busy scrutinizing the board, but we thought this was a “can’t lose” trade, so it was safe to leave. By the time we came back, I was just about wiped out. I remember this feeling of shock, dismay, and incredulity.

I will never forget the image of John—he was a very portly guy with thick, opaque glasses—going up to the quote board, pounding and shaking his fist at it, and shouting, “Doesn’t anyone want to make a guaranteed profit!” Later on, I learned that August pork bellies were not deliverable against the February contract. The logic of the trade was flawed in the first place.

So where did he come up with this story about doubling your money every two 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—which was nothing—and that I was going to fire him. No more potato chips; no more diet soda. I’ll never forget his response. He told me, “You are 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 trading stake. Then I am going to become a millionaire and retire.” The thing that amused me was that he didn’t say, “I’m going 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.

To this day, I have no idea. For all I know, he might be living in Bermuda as a millionaire because he washed dishes.

After that, I managed to rustle up another $500 and placed a few silver trades. I wiped out that stake as well. My first eight trades, five with John and three on my own, were all losers.

No. I had always done well at school, so I figured it was just a question of getting the knack of it. My father, who died when I was fifteen, had left $3,000 in life insurance, which I decided to cash in, despite my mother’s objections.

But I knew I really needed to learn something before trading again. I read Chester Keltner’s books on wheat and soybeans, and I also subscribed to his market letter, which made trading recommendations. I followed the first recommendation, which was to buy wheat, and it worked. I think I made 4 cents per bushel [$200] on that trade. It was my first win and very exciting.

Then between letters, the market fell back to my original buying price, so I bought it again and made another profit on my own. I felt I was beginning to develop a sense for trading. Even in the beginning, I liked the feeling of doing things on my own. What happened next was just sheer luck. I bought three contracts of December corn in the summer of 1970, based on a Keltner recommendation. That was the summer that blight devastated the corn crop.

Yes, that trade combined with buying some more corn wheat, and soybeans, partly on recommendations in the letter, and partly on my own intuition. When that glorious summer was over, I had accumulated $30,000, a princely sum to me, having come from a middle class family. I thought it was the best thing in the world.

I took some on the way up and some when the markets started coming down. Overall, I cashed in very well.

Yes. Then that fall I attended graduate school in Worcester, Massachusetts, but I found that I didn’t want to think about my thesis. Instead of going to class, I would often sneak down to the Paine Webber office in Worcester to trade.

I was having a great time. I made a little money, not a lot. I was shocked to find myself cutting classes frequently, since I had been a dedicated scholar at Johns Hopkins. I realized that the handwriting was on the wall, and in December 1970 I dropped out of school and moved to New York. I stayed at the Y for a while. When people asked me what I did, I rather pompously told them that I was a speculator. It had a nice ring to it.

In the spring of 1971, the grains started getting interesting again. There was a theory around that the blight had wintered over—that is, it had survived the winter and was going to attack the corn crop again. I decided I would be really positioned for the blight this time.

I think Keltner believed it too. I borrowed $20,000 from my mother, added it to my $30,000, and bet everything on the blight. I bought the maximum number of corn and wheat contracts possible for $50,000 in margin. Initially, the markets held steady because there was enough fear of the blight to keep prices up. I wasn’t making money, but I wasn’t losing it either. Then one day—I will never forget this—there was an article in the Wall Street Journal with the headline: “More Blight on the Floor of the Chicago Board of Trade Than in Midwest Cornfields” [he laughs]. The corn market opened sharply lower and fairly quickly went limit-down.

[In many futures markets, the maximum daily price change is restricted by a specified limit. Limit-down refers to a decline of this magnitude, while limit-up refers to an equivalent gain. If, as in this case, the equilibrium price that would result from the interaction of free market forces lies below the limit-down price, then the market will lock limit-down—i.e., trading will virtually cease. Reason: There will be an abundance of sellers, but virtually no willing buyers at the restricted limit-down price.]

Did you think of getting out on the way down before the market was locked limit-down?

I felt that I should get out, but I just watched. I was totally paralyzed. I was hoping the market would turn around. I watched and watched and then after it locked limit-down, I couldn’t get out. I had all night to think about it, but I really had no choice. I didn’t have any more money and had to get out. The next morning, I liquidated my entire position on the opening.

I lost my own $30,000, plus $12,000 of the $20,000 my mother had lent me. That was my lesson in betting my whole wad.

I was really upset. I decided I had to go to work. Since there was a recession at the time, I thought I probably couldn’t get a really good job and should try to settle for a lesser position. I found that even though I interviewed for positions for which I was unusually well qualified, I couldn’t seem to get any job. I finally realized that I couldn’t get these jobs because I didn’t really want them.

One of the best job openings I found was a commodity research analyst slot at Reynolds Securities. I discovered that it was easier to get this better position because they could tell I really wanted it. I learned that if you shoot for what you want, you stand a much better chance of getting it because you care much more.

Anyway, there was a glass partition between my office and the main office where the brokers sat. I still had the trading bug and it was very painful to watch them trading and whooping it up.

Right, because the analysts were strictly forbidden to trade. But I decided I wouldn’t let that stop me. I borrowed from my mother again, my brother, and my girlfriend and opened an account at another firm. I worked out an intricate code system with my broker to keep people in my office from knowing that I was violating the rules. For example, if I said, “the sun was out,” that meant one thing, while if I said, “the weather is cloudy,” it meant something else.

While I was trying to write my market reports, I kept peering out through the glass partition to see the prices on the big trading board in the main office. When I was winning, I tried to hide my elation, and when I was losing, I had to make sure not to let it show on my face. I don’t think anyone ever caught on, but I was in a manic-depressive state throughout that time. I felt tortured because I wanted to be free to trade without going through this elaborate charade.

I lost. It was the same old cycle of borrowing money and consistently losing it.

Good question. Basically, I had no real grasp of trading principles; I was doing everything wrong. Then in October 1971, while at my broker’s office, I met one of the people to whom I attribute my success.

Ed Seykota. He is a genius and a great trader who has been phenomenally successful. When I first met Ed he had recently graduated from MIT and had developed one of the first computer programs for testing and trading technical systems. I still don’t know how Ed amassed so much knowledge about trading at such an early age.

Ed told me, “I think you ought to work here. We are starting a research group and you can trade your own account.” It sounded great; the only problem was that the firm’s research director refused to hire me.

I couldn’t imagine why since I wrote well and had experience. When I pressed him for a reason, he told me, “I can’t hire you because you already know too much and I want to train somebody.” I said, “Look, I will do anything you want.” Eventually, I convinced him to hire me.

It was really great, because I had Ed to learn from, and he was already a very successful trader. He was basically a trend follower, who utilized classic trading principles. He taught me how to cut my losses, as well as the importance of riding winners.

Ed provided an excellent role model. For example, one time, he was short silver and the market just kept eking down, a halfpenny a day, a penny a day. Everyone else seemed to be bullish, talking about why silver had to go up because it was so cheap, but Ed just stayed short. Ed said, “The trend is down, and I’m going to stay short until the trend changes.” I learned patience from him in the way he followed the trend.

I would sometimes think that maybe I ought to stop trading because it was very painful to keep losing. In Fiddler on the Roof, there is a scene where the lead looks up and talks to God. I would look up and say, “Am I really that stupid?” And I seemed to hear a clear answer saying, “No, you are not stupid. You just have to keep at it.” So I did.

At the time, I was befriended by a very kind, knowledgeable, and successful semiretired broker at Shearson named Amos Hostetter. He liked my writing, and we used to talk. Amos reinforced a lot of the things Ed taught me. I was getting the same principles from two people.

They were better because I was more patient. Anyway, I was totally out of money, and out of people who would lend me money. But I still had a kind of stubborn confidence that I could somehow get back on the right track again. I was only making $12,500 a year, but I managed to save $700. Since that wasn’t even enough to open an account, I opened a joint account with a friend who also put up $700.

Yes, my friend didn’t know anything about the markets. This was in July 1972 and, at the time, we were under price controls. The futures market was supposedly also under price controls.

Yes. As I recall, the plywood price was theoretically frozen at $110 per 1,000 square feet. Plywood was one of the markets I analyzed for the firm. The price had edged up close to $110, and I put out a bearish newsletter saying even though supplies were tight, since prices couldn’t go beyond $110, there was nothing to lose by going short at $110.

How did the government keep prices at the set limits? What prevented supply and demand from dictating a higher price?

Right. What was happening though was that the price was being kept artificially low, and there is an economic principle that an artificially low price will create a shortage. So shortages developed in plywood, but supposedly the futures market was also under this guideline. However, no one was sure; it was sort of a gray area. One day, while I was looking at the quote board, the price hit $110. Then it hit $110.10; then $110.20. In other words, the futures price was trading 20 cents over the legal ceiling. So I started calling around to see what was going to happen, but nobody seemed to know.

Yes. Anyway, nothing happened. I think the market closed somewhere over $110 that day. The next day it opened at about $110.80.1 used the following reasoning: If they let it trade over $110 today, they might let it trade anywhere. So I bought one contract. Well, ultimately, plywood went to $200. After I bought that first contract, and prices rose, it was just a matter of pyramiding and riding the position.

Was that your first really big trade after you had been wiped out in the corn market?

The futures market functioned as a supply of last resort to users who couldn’t get supplies elsewhere.

Yes. Those who were frozen out because they didn’t have any longstanding relationships with producers could get their plywood at a higher price in the futures market. The producers were fuming at the thought that they had to sell at the legal price ceiling.

Why didn’t producers just sell futures and deliver against the contract as opposed to selling in the cash market at the price control level?

The smarter ones were learning that, but it was the infancy of futures trading in plywood and most producers weren’t that sophisticated. Some producers probably weren’t sure that it was legal to do that. Even if they thought it was, their lawyers might have told them, “Maybe people can buy plywood at any price in the futures market, but we better not sell and deliver above the legal ceiling.” There were a lot of questions.

Well not exactly, but I will get back to that. In just a few months, $700 had grown into $12,000 trading plywood.

Yes. Then I 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.