The New Market Wizards: Conversations with America's Top Traders (41 page)

GOD IN THE PITS

T
he subtitle of this chapter is taken from Mark Ritchie’s autobiographical book—a highly unusual blend of spiritual revelations, exotic experiences, and trading stories. It certainly does not mean to imply, however, that Ritchie believes he has deity-like trading prowess. On the contrary, the title refers to Ritchie’s convictions about the presence of God that he perceives in his life.

It is hard to imagine an educational background further removed from trading—Mark Ritchie attended divinity school. (No, it doesn’t help in praying for positions.) While attending school, he barely scraped by, working a variety of part-time jobs such as correctional officer (night-time shift) and truck driver. In those days, he was so poor that when he drove a truck, he sometimes could not even afford to fill the tank. Mark initially got hooked on trading when he accompanied his bother, Joe, on a visit to the Chicago Board of Trade.

Mark spent most of his trading career on the floor of the Chicago Board of Trade, specializing in trading the soybean crush (explained in the interview). Although he was consistently successful as a floor trader, about five years ago he decided to try trading from an office.

Realizing that this type of trading was completely different from the trading he had been accustomed to, Mark Ritchie devoted himself to researching various possible trading approaches. The first year was fairly tough because his inexperience led him down many blind alleys. Despite these early difficulties, his off-the-floor trading proved remarkably successful. His trading account, which started with $1 million in 1987, registered an average annual return of 50 percent over the next four years.

Ritchie’s interests have ranged far beyond the world of trading. In recent years, he has become intensely involved in philanthrophic efforts aimed at helping a primitive Amazonian tribe. His involvement has not been confined to monetary contributions, but has included numerous extended stays living among the tribespeople. Ritchie has compiled a series of narratives told from the perspectives of the Indians into a recently completed manuscript.
Victim of Delusion
.

My first contact with Mark Ritchie occurred when he sent me his book,
God in the Pits
[MacMillan, 1989], inscribed with a beautiful compliment of my own first book. I responded with a letter, and further correspondence ensued. This book of interviews, however, provided the catalyst for our first meeting. I found Mark Ritchie to be very personable, low-key, and sincere. The interviews were conducted over several sessions in CRT’s offices.

I think you’re an ideal person to whom to address this question, since you’ve made a life of blending the trading business (much of it on the floor) with an obvious deep sense of ethics. There has been a lot of publicity about the ethics of floor brokers, as particularly highlighted in the relatively recent FBI sting operation on the Chicago futures exchange floors. Are we talking about a small fringe element, like in any other industry, or does the temptation of large dollar amounts actually lead to a more serious problem of dishonesty? Without mentioning any names, of course.

If I mentioned any names, I know you wouldn’t print them. How could you [
he laughs
]? You’re starting off with the heavy stuff here.

It varies drastically from pit to pit. Each pit is almost a culture in itself. A pit has its own personality. I used to spend 90 percent of my time in the soybean meal pit, and the traders there are some of the nicest and most honest people I’ve known in my life. In one sense, you have to be awfully honest to be in this business, where huge transactions take place with a nod of the head. Having said that, though, there’s tremendous opportunity to cheat. However, I don’t believe there are any more cheats in this business than, say, among plumbers or lawyers.

Now
there
is a raving endorsement. It reminds me of a sign I saw for sale in a country store saying simply, “Honest Lawyer.”

[Laughing]
That’s probably the only one they made, and they’re still waiting to sell it! There’s no industry that has a corner on crooks. Think of the jokes we can make about dishonest politicians. Essentially, I think there’s probably the same percentage of dishonest people in our business as in any other. The difference is in the payoff for a dishonest act. There are people on the exchanges who would fill orders for nothing, simply for the opportunity to bucket trades. In fact, I have been told there are brokers who would even pay to fill orders—if they could do it with a straight face. The broker who told me this said that the conflict of interest between trading his own account and filling customer orders was so great that the only way he could sleep at night was to refuse to ever do any customer orders.

What is your own opinion of the FBI’s sting operation? Do you think it uncovered a real problem, or was it overblown?

I think that all the honest people in this business were thankful that something was finally done. For years, I’ve been saying that if we didn’t clean up our own business, someone else would do it for us, and we wouldn’t like the result. Instead of a scalpel, they’d likely use a dull chainsaw.

Let’s switch the subject. In your estimate, what percentage of the people who come to the trading floor to make their fortune actually succeed?

Well, I really don’t know, but I’ll give you my best guess. I’d say roughly 10 percent do well, and maybe 1 percent do extremely well. But that’s only a wild guess. I’d be willing to accept anybody else’s percentages.

That’s a relatively low success rate. What would you say is the primary reason so many apparently fail?

Lots of people in this business who pass themselves off as successes are really failures. I know one person in particular who to this day writes articles in industry publications and is often quoted by the press, yet he hardly knows the first thing about successful trading. One time, I was holding a position in a volatile interest rate spread. The trade was going against me, and I was nervous about the position. This particular trader was holding the same position and seemed quite worried.

“Do you think I’m overtrading?” he asked me.

I questioned him about his account size and the number of contracts he held. “I have $25,000 in the account,” he said, “but I can’t afford to lose it, and I have a fifty-contract position.”

My mouth fell open. I had about $1,000,000 in my account for a position that was only twice as large, and I was even worried about that. “Overtrading, wouldn’t even begin to communicate it,” I said.

So he takes off half the position and says, “I’m OK now, right?”

“You’re not OK,” I said. “You haven’t even begun.”

There’s no way you can communicate with a person like that. I remember saying to the people who were clearing his orders that he was a walking time bomb.

Did he eventually self-destruct?

Absolutely, and he left the clearing firm with a huge debit, which he had to work off.

How do you decide when a position is too large?

I have a rule that whenever I’m still thinking about my position when I lay my head on my pillow at night, I begin liquidation the next morning. I’m hesitant to say this because it could be misconstrued. You know that I’m a praying person. If I find myself praying about a position at any time, I liquidate it immediately. That’s a sure sign of disaster. God is not a market manipulator. I knew a trader once who thought he was. He went broke—the trader, I mean.

I assume this sensitivity to trading too large or letting losses get out of line is one of the ingredients that has made you successful.

Absolutely. Magnitude of losses and profits is purely a matter of position size. Controlling position size is indispensable to success. Of all the traits necessary to trade successfully, this factor is the most undervalued.

As soon as you mention position size, you also bring up the topic of greed. Why did the trader I just mentioned hold a huge position backed up by only $25,000 he couldn’t afford to lose? I will not presume to be judgmental. A person must look inside for these answers. But it would be foolish to overlook the human vice of greed. The successful trader must be able to recognize and control his greed. If you get a buzz from profits and depressed by losses, you belong in Las Vegas, not the markets.

What other traits do you think are important to be successful as a trader?

You have to be able to think clearly and act decisively in a panic market. The markets that go wild are the ones with the best opportunity. Traditionally, what happens in a market that goes berserk is that even veteran traders will tend to stand aside. That’s your opportunity to make the money. As the saying goes, “If you can keep your head about you while others are losing theirs, you can make a fortune.”

Actually, I thought that line ended with, “… then you haven’t heard the news.”

[Laughing] That’s right. That’s the risk. Maybe you haven’t heard the news. But, on the other hand, it’s also often an opportunity. If it looks too good to be true, the rest of the market may know something that you don’t. But usually the way we miss opportunities in this business is by saying, “It looks too good to be true,” and then not doing anything. Too often we think that everybody else must know something that we don’t, and I think that’s a critical mistake.

How many times have you heard someone put down an idea you’re excited about by saying, “If it’s such a good idea, why isn’t everyone doing it?” This is the battle cry of mediocrity. Think about it for a minute. Any investment opportunity that everyone else is doing is by definition a bad idea. I would always recommend doing the opposite. The reason markets get out of line is because everyone is doing the wrong thing. The good trader always sticks with his own ideas and closes his ears to the why-isn’t-everyone-doing-it cry of the crowd. He’ll make a trade against the crowd at a conservative level that he can afford, and then get out if he’s wrong. That’s what a stop is for.

You need to have the courage to stand up against the crowd, decide your position, and execute it. One experience that really brought this home to me was when I was taking flying lessons. I had the theory down, but not very much experience. I was coming in for what was my second or third landing. When I was only about twenty or thirty feet above the runway, several gusts of wind blew the plane all over the place. I fought the plane down for what was probably the worst landing ever in history. When I finally brought the plane to a stop, I was actually chuckling at how terrible a landing it was, wondering what the instructor would say.

“Well, that was really impressive,” he said.

I laughed a little more and asked, “What was impressive about that? I thought it was terrible.”

He replied, “I have never seen any other beginner do that. Any other beginner would have taken his hand off the stick, given up, and expected me to land the thing. You hung in there and implemented the program all the way until the landing was complete.” He paused for a moment and added, “You’re right, though, it was terrible. Just terrible.”

I thought about that later and realized that that is the trait you have to have to trade.

That trait being what?

The ability to implement your ideas despite adverse conditions. There is no opportunity in the market that is not an adverse condition situation.

So the ability to think clearly and have courage when others are in a panic is an element of a successful trader?

Indispensable.

Is that an innate ability? I assume you either have it or you don’t. You can’t quite train yourself to act that way, can you?

I’m not sure, but I don’t think it’s innate. You can prepare for it by having a game plan, Once I had a coach who when I stepped up to the plate would yell, “Have an idea?! What are you going to do?” Investing is the same. You have to know what you’re going to do when the market gets out of line. Generally speaking, it’s human nature to hesitate.

What do you do to prepare?

I go through a mental process. I decide what I’m going to do when X, Y, or Z happens. If X, Y, or Z is a surprise, then you’re part of the crowd.

Your book
God in the Pits
was extraordinarily personal. Didn’t you have any reticence about being so open in print?

I remember one reviewer called the book “embarrassingly personal.” Sure there was some reluctance to be that vulnerable. In the first few months after the book was released, I could hardly look anybody in the eye who said they had read it, because I felt they knew more about me than was necessary.

Does that imply that you had second thoughts? Would you do the same thing all over again?