The New Market Wizards: Conversations with America's Top Traders (42 page)

Yes, I would. My hope was that the book would make people take a long, honest look at themselves—at their relationship to others and their relationship to God. How could I expect people to honestly confront these questions unless I was willing to do the same. I’m sure that after having read the book, most people are probably disappointed when they meet me, because I can’t be as honest in person as I tried to be in print.

How did you first get involved in this business?

In the early 1970s, my brother, Joe, was working for a silver coin dealer in Los Angeles. He had come to Chicago to explore the possibility of setting up a silver arbitrage operation between the Chicago and New York markets. [Silver is traded in both New York and Chicago. Theoretically, the price should be the same in both locations. However, occasionally, large influxes of either buy or sell orders in one market or the other may result in a temporary price disparity. Arbitrageurs tend to profit from this aberration by buying silver in the lower-priced market and simultaneously selling an equivalent amount in the higher-priced market. Since many arbitrageurs are competing to profit from these transitory distortions, the price in the two markets will never get too far out of line. In essence, arbitrageurs try to lock in small, virtually risk-free profits by acting very quickly to exploit inefficiencies in the marketplace.]

Joe asked me to join him in visiting the Chicago Board of Trade. He also needed to borrow a suit. At the time, I had only two suits to my name. One was ragged and the other I had picked up wholesale for $60. Since Joe would do the talking, I gave him my good suit.

When we arrived at the exchange, we inquired at the president’s office about memberships and trading privileges. Upon seeing us, one of the exchange officials slowly eyed us from head to toe and back again and said, “You boys have got to be in the wrong place!”

Was that the end of the conversation?

No, but the whole conversation was about as strained as you might expect after an opening comment like that. Joe asked him about the possibility of getting a membership, but the exchange official just couldn’t get the smirk off his face. “Do you know the financial requirements to become a clearing member?” he asked disdainfully.

Did you?

No, of course not
[laughing].
We had no idea! We couldn’t have guessed within two decimal places. The whole conversation was almost a joke. I was glad I wasn’t the one doing the talking.

After that inauspicious start, we made our way to the visitors’ gallery. I had heard rumors about the floor of the exchange being a wild place. We stood there watching for a bit. Although everyone was running around and there was a lot of noise, it didn’t seem as wild or exciting as we had expected. Suddenly, we heard this ear-shattering dong and the floor erupted into sheer pandemonium. Obviously, we had been watching the market before the opening. And this was a particularly hectic trading session. The crowd in the pits flowed from the bottom up and back again in waves. Our mouths dropped open in astonishment. At that moment, both Joe and I decided that this was the place for us. It just looked like a barrel of fun.

Did you have another job at this time?

Actually, I was going to seminary school, majoring in philosophy of religion. I had a job as a correctional officer working the midnight-to-eight shift. It almost covered the rent and tuition.

Did you ever finish divinity school?

Yes, after I got into the business. It took me seven years to complete the degree.

Were you planning to use your religious training?

I wasn’t headed to be a member of the cloth, although that was an option. I was mainly in seminary to answer some personal spiritual questions that were nagging me. I had no specific plans.

You had no real plans about how you were going to earn a living?

No, I was too idealistic for that. This was the late 1960s and early I970s. We had the feeling that if you just did right, everything else would take care of itself. You remember, this was the attitude that society thought was so naive.

How did you first get on the exchange floor?

About six months after our visit to the exchange, Joe’s company sponsored him to start a silver arbitrage floor operation. Several months later, I got a job with the company as a phone clerk on the floor. That job lasted for over a year. Then the volatility in the silver market declined sharply from the hectic levels of the 1973–74 period, and the arbitrage opportunities dried up. Or, perhaps more accurately, the opportunities were still there, but too small to justify an operation that was paying nonmember clearing rates. In any case, the company let me go.

Did you try to stay in the business?

I found a job for a company that was marketing commodity options to the public.

Now correct me if I’m wrong, but as I remember it, this was well before exchange-traded options, and the companies that were selling options at the time were charging the public exorbitant premiums. [The “premium” is the price of an option.]

Unconscionable prices. Rip-off levels. Their markup was approximately 100 percent. They would buy an option for $2,000 and sell it for $4,000.

When you went to the interview, did you turn down the job because you were aware of what was involved?

I had no idea what was going on.

Were you offered the job?

Yes.

Then what happened?

I worked there for about a day and realized that the entire operation was basically involved in cold calling. They had lists of possible investors and they called these people to convince them to buy options.

In other words, you found yourself in a boiler room operation?

Exactly [laughing]. I was introduced to what the other side of the business was all about.

After I was hired, I went to their training program, which was aimed at teaching us how to sell options. Since, at the time, U.S.-traded options did not yet exist, they were buying the options in London and selling them to the public at a high markup. They had written scripts on how to sell. You’d call up somebody and say, “Hello Mr. so-and-so. We understand that you are a wealthy investor, and that is how we got your name. You are obviously the type of intelligent person who can appreciate this kind of opportunity.” You’d butter him up.

I’m sitting there with a trader’s mentality, and I’m thinking to myself that if I’m going to sell something to somebody, I want to know the track record.

Did you ask the instructor?

Certainly. He answered, “We make money for our clients.”

So I asked him, “How much? Exactly what am I going to tell the people whom I’m calling? What kind of percentage return can they expect?”

He stared at me as if I were asking frivolous questions, and with a suspicious look said, “Why would you want to know about all that stuff?”

In other words, was his attitude: What difference does it make?

Of course, that was exactly his attitude. “The point is to sign the guy up,” he said.

Well, what were you supposed to tell people when they asked you how much they could make on the investment?

Oooooh, “You’re going to make big bucks! Sugar is going to double!” Or you might hype a special sale. Sometimes they would come up with these specials where a $4,000 option was being sold for $3,000. My guess is that it was probably an option they had bought at $2,000, which was running out of time and about to expire worthless, and they just wanted to dump it. So they would call up all their people and tell them they had a special on this option.

How were you supposed to handle the question from the potential
investor
—and I use the term loosely—who asked to see a track record?

I asked a question exactly like that. The instructor said, “Our records show that 62 percent of our clients make money.”

Was he lying outright?

Well, I think he had some figures, but it was difficult to say what they meant. Maybe 62 percent of the clients had made a profit on a trade at one time or another. However, for all I know, most of them were wiped out. So I kept pressing the question.

Was his attitude: Stop bothering me kid?

Was it ever! Anyway, I kept on pressing the issue. I asked him, “Look, I’m selling an option for $4,000. At what price can the buyer sell it back?” You can always tell very quickly whether a market is legitimate by simply asking for a quote on the other side.

He gave me this funny look and asked, “Why would he want to sell it? He’s buying it from you. He’s going to hold it until he makes a lot of money.”

So I said, “Hypothetically, if he wanted to sell it the next day, what price could he sell it at? I’m used to a market. A market means that there are buyers and sellers.” He kept on evading the issue, and this went back and forth for a while. Finally I said, “Just tell me what you paid for the $4,000 option.”

He gave a deep sigh, leaned on his desk and said, “Now look. If you go into a furniture store and refuse to buy the furniture until the salesman tells you what he paid for it, he’s not going to tell you. You can ask that question all day, but eventually he’s going to tell you to fuck off. And that’s exactly what I’m telling you.” There was a long silence in the classroom.

How was the rest of the class reacting to this whole interchange?

They were beginners to the business and didn’t have a clue to what was going on. One of the trainees had seen a company salesman drive up in a Corvette, and that was all he needed; he was signed up right then and there.

Were you asked to leave?

No. But I was kind of embarrassed by the whole situation. I eventually mumbled something along the line that if most people were making money then it was probably all right.

But you didn’t really believe that, did you?

No, of course not. In fact, at one point, the phone rang and the instructor answered saying, “He’s on the trading floor, let me get him.” I thought to myself, “I didn’t know there was a trading floor in this building.” He opens the door to this big room, packed with people at desks—the so-called trading floor, which you have aptly described as a boiler room—and yells at the top of his voice: “Hey Bob, pick up the phone!” They loved that trading-floor-pandemonium ambience. I said to myself, “Trading floor? This thing is nothing but a con operation. These people are conning themselves.” In fact, a lot of dishonesty in this business begins when people are dishonest with themselves.

Do you really believe that they had glossed over the facts so much in their own minds that they didn’t realize they were completely ripping off the public?

I think so. I believe the majority of crooks have told themselves enough lies that they begin to believe them. For example, the floor brokers who were indicted in the FBI sting operation that we talked about earlier generally said, “Hey, I wasn’t doing anything anybody else wasn’t doing.” It’s not true, but I think they believe it.

Did you quit at that point?

I made a few half-hearted calls on the first day following the training session, but it had a feel of scam written all over it. I left after that and never came back.

Are there any trades that you would consider particularly memorable?

One that comes to mind occurred on the day the Falklands war broke out. People off the floor have the idea that the traders on the floor are the first to know what’s going on. Nothing could be further from the truth. The market erupts long before we ever get the news. We’re the last to hear what’s driving the market. On that day. I had taken a large position in soybean meal at what looked like a great price. By the time I got out of the position, in what was probably only one minute, I had lost $100,000.

Any other memorable trades?

I’ve always lost money faster than I’ve made it. One particularly striking instance concerned the roaring gold market during the period from 1979 to early 1980. Gold was sitting at around $400 when Iran took the hostages. I thought that the heightened tensions aroused by this situation would push gold prices much higher. But the market responded sluggishly, so I hesitated. The market eventually did go higher; it went to almost $500 over the next month. This was a classic example of not doing what you know should be done.