Stock Market Wizards

by Jack D. Schwager

  In retrospect, do you consider your rejection from journalism school a lucky event?

  I consider it a huge stroke of luck. My father always told me that I had to differentiate between my hobbies and my career. I think he’s right. My mother recently asked me if I had any regrets at not having pursued any of these other interests. At first I said that I didn’t, because I was basking in the success I’ve had with this business, but every day that goes by, I regret it more and more. Eventually, I can see myself veering back.

  Veering back to drawing or writing?

  Maybe both, maybe neither. I always thought that the best way to combine my interests in drawing and writing was films, particularly short films. I have a lot of ideas already. Nothing that would be commercial; stuff that probably would have an end audience of three people in the world.

  Have you ever made any films?

  No, I would have to take a film course just to learn how to point the camera.

  Are you thinking of giving up trading in lieu of these other interests?

  I really admire people who do what they want to do and don’t care about anything else. I had a friend in college who was determined to be a rock and roll star. He formed the band The Cowboy Junkies. When he started college, he couldn’t even play a guitar, and now he is sold out at every concert. But I know myself. I like the comforts of life, and for me this business is the best way to acquire them. Although, eventually, I will probably pursue some of these other interests, it’s not something I see happening in the immediate future.

  What happened after you were rejected from journalism school?

  I decided to go for an M.B.A because I thought it was the best way to get a job.

  Did you give any thought to what you might do with your M.B.A.?

  I intended to go into advertising because it was the one business career I thought might satisfy my creative side. But the opportunity never arose. When I graduated, the economy in Canada was terrible. There were only two jobs offered on campus. One was a management trainee position with Lloyds Bank. The job appealed to me because of the location: New York or London. I thought it would be great to work in either of those two cities. I applied and got the job. They sent me to a training program in New York. I spent most of the training program in the foreign exchange trading room, which was a fluke because I was supposed to be trained as a loan officer and sent back to Canada.

  So you fell into a trading environment entirely by chance.

  That is one reason why I believe anyone can do this job; I don’t think you have to be born to do it.

  I don’t know about that. I can assure you that among the hundreds of thousands of people who try trading, very few can even remotely approach your track record. What was your job at the foreign exchange desk?

  I was just a flunky. I took customer orders and did other assorted tasks. I had to be at work at 3:30 A.M.—which was brutal for a single guy living in New York—to get everything ready for the traders. I clipped newspaper articles for them and made sure their order tickets were in place. It was a glorified gofer position.

  Did you have any interest in financial markets at the time?

  None at all. I was still wrapped up in the idealism of my previous academic life. I looked down on my M.B.A. My thoughts were, “What happens to all the learning and academics I’ve done? Does it all just get shoved away for the rest of my life?”

  The job in the foreign exchange department didn’t help matters at all. If anything, it turned me off to trading because of all the day-today friction. The job was my first introduction to Americans; I had been surrounded by Canadians all my life. Canadians are more laid-back; they are more concerned about etiquette than going for the jugular or getting their point across. There were traders on the desk who would just scream at me all the time. Most times, I didn’t even know why. Maybe it was because they needed someone to take it out on when their positions went bad, or maybe it was because I didn’t do things quickly enough for them. I would go home every night upset because someone had shouted at me.

  How long did you stay at this job?

  For about six months. I left because I found out through the grapevine that I was about to be transferred to Toronto. At that point, I loved living in New York, and I had also just met my wife-to-be and didn’t want to leave her. Therefore, I took a job at the New York branch of another Canadian company, Wood Gundy. One attraction of the new job was that they offered to get me a green card; I had been in the United States on a temporary visa.

  What was the job you got?

  It was a little bit less of a flunky job. I went through Wood Gundy’s training program and was placed on the equity desk. I was just an order taker, which was very boring. The customer was making the decision, and the floor broker was executing the trade; I was nothing more than an intermediary. I always laugh when brokers on the sell side of the stock business call themselves traders. Well they are not traders; they are just order takers. None of them are taking positions for the house or with their own money.

  At that point, I made the first trade for my own account. My girlfriend, who later became my wife, worked for Liz Claiborne. She kept telling me how great her company was doing: “I don’t even have to call my customers, they’re calling me.” Since I didn’t have any money to invest, I called my father for a loan. “Dad,” I said, “I have a great idea; you just have to lend me some money.” He loaned me $10,000, and I put it all into Liz Claiborne stock. The stock quickly went up three points, and I took my profits. But the worst thing you can do as a beginning trader is to have your first trade work. Within three weeks, I had lost not only all my profits from the Liz Claiborne trade, but also all the money my father had lent me.

  How did you do that?

  I was so taken with the success of my first trade that I started listening to all sorts of tips and rumors. The guy delivering my coffee in the morning could tell me about a stock, and I would buy it. I was cleaned out in three weeks. It took me five years, a little bit at a time, to pay back my father.

  What did your father say when you told him you had lost the money?

  “Well, I thought that you would,” he said, “but I appreciated that you had an idea and wanted to follow through on it.” Ironically, the Liz

  Claiborne stock, for which I had originally borrowed the money, continued to go straight up, quintupling in a year.

  What was your next trading experience?

  The Wood Gundy equity desk was another version of New York verbal abuse. Once again, I found myself at a job where the guys on the desk were constantly yelling at me. It was just regular day-to-day business, but I hated it. When I looked across the room to the bond trading desk, I noticed that everyone was very quiet. They weren’t shouting at each other; they were very civil. That appealed to me. I got permission to switch to the bond trading desk.

  At the time, Wood Gundy was trying to become a major dealer in the U.S. bond market, and they had brought in a bunch of hired-gun traders. These guys were just blowing up left, right, and center. There were huge losses everywhere. One trader even hid his tickets to conceal his losses. Eventually almost everyone was fired, though I was still left, along with a few others.

  Were you happier on the bond desk?

  I had mixed feelings. I was certainly happy to get away from the verbal abuse. Also, the bond desk was very exciting because it traded huge position sizes compared with the equity desk. I liked the idea that I could make or lose five times as much as twenty people combined on the equity desk. But I didn’t like being responsible for trading all sorts of illiquid issues, most of which were overseas bonds.

  The Japanese would call me at 2 or 3 A. M., and I would have to make bids or offers on huge sums of illiquid bonds without even knowing where the market was. And because I was sleepy, it was possible to give them the wrong quote. If you gave them a quote that was off by 100 basis points, they would hold you to it. You could have a $1 million loss on an obvious error, and they would st
ill insist on the trade being valid.

  Did that ever happen to you?

  Oh yes.

  You had a $1 million error?

  Well I didn’t have a $1 million error, but I had a $300,000 error. Just because you gave them the wrong quote.

  I was sleepy. I thought the yield was 9.5 percent when it was really 10.5 percent.

  Is it normal to be held on a trade on a quote that is obviously an error?

  It certainly wouldn’t be considered normal in North America, and I doubt that it would be the case anymore in Japan.

  How did you do on balance in your trading?

  I did well and was promoted as the youngest vice president at Wood

  Gundy.

  On what basis were you making buy and sell decisions?

  I didn’t have any methodology. I almost got to the point where I thought the market was random.

  But you must have been doing something right if you were making money. Was it just a matter of gut feel?

  All the trading I do involves gut feel. But at that point in my life, I think I was bailed out because there was a major bull market in bonds, and my instincts were apparently good enough to keep me off the short side for the most part. In my best year, I made about $700,000 for the desk, which is really nothing, considering it has to be split among so many different people.

  One time, over drinks with my boss, I said, “We’re not really trading these bonds; we’re really investing, just like one of our accounts. And if that is what we’re doing, there are better things to invest in.”

  “Don’t go off half-cocked,” he said. “We just have to keep dodging and weaving.”

  It was at that point, after three years, that I really started to burn out. I went as long as I did because it was exciting having the responsibility of trading that much money.

  By that point, had you developed a passion for trading?

  Yes, I knew it was something I loved to do. I liked the idea that it was me against the markets. I just didn’t care for the markets I was trading. One major source of frustration was that the bond issues we were trading in New York were highly illiquid. I decided to transfer to the main office of Wood Gundy in Toronto because there I could trade Canadian government bond securities, which were far more liquid. At first I was very happy to be in the main office, trading liquid bond markets, with lots of activity. After six months, however, I realized that I didn’t want to work in Canada. It’s a country club environment where success has more to do with politics than with your performance. I was also getting very sick of bonds and interest rates.

  Why?

  Because it is such a commodity. At our morning meeting a standard question always was: “What is going to happen today?” All the participants would give this spiel about why they thought the market was going up or down. They would talk about the influence of currency rate movements, fiscal and monetary policy, interest rate trends in the United States and other countries, and so on. When my turn came, I would simply say, “I think the market is going down today.” When they asked me why, I would answer, “Because it went up yesterday.” They didn’t know whether to take me seriously or not. I had reached the point where I thought the market was so efficient that if the price went up big one day, it was just as likely to go down the next day.

  One morning I woke up and realized that I didn’t want to worry about interest rates again for the rest my life. I knew that I couldn’t stand to trade another bond. I walked into work and quit, even though I had moved to Canada only seven months earlier. They couldn’t believe it.

  You quit even though you didn’t have another job?

  Oh yeah, I just couldn’t stand it anymore. The ironic thing is that my wife called me the same day to tell me that she had quit her job, and I hadn’t even hinted to her that I was going to quit mine. I knew she had been unhappy, but I didn’t think she was on the verge of quitting. It was amazing that we both quit our jobs independently on the same day. We decided to delay looking for new jobs so that we could take six months to travel across the United States, going from ski resort to ski resort.

  When we were at Lake Tahoe, we took a side trip to San Francisco. We loved the city and decided to move there. When we returned to Toronto after the end of our trip, we thought it would be a good idea to revisit San Francisco before actually moving, just to make sure that we still liked it as much as we had on our visit. While we were there, we looked for jobs, and we were both offered positions. We even found a house we liked and put in a bid that was accepted. We thought we were set. We flew back to Toronto, rented a truck, and moved our stuff to San Francisco. But when we got there, we found out that both jobs had fallen through.

  What was the job you thought you had?

  I had interviewed with a small venture capital firm. The person who interviewed me had also graduated from McGill.

  You must have thought that gave you the inside track.

  Yes, he was very enthusiastic. “Oh sure, we can use you. Come back out, and we will set you up.” When I arrived in San Francisco, I kept calling him, but didn’t receive any return phone calls. When I finally got through to him, he said, “Oh, we’re not hiring M.B.A.s this year.” It was a complete reversal from what he had told me before.

  I had put my life savings into the down payment for the house, so we hardly had any money left. Initially we weren’t worried because we thought we would get jobs in a month or two. Month after month went by, however, and neither one of us got a job offer. I couldn’t believe it. I started drinking cheap beer and sleeping late.

  Were you depressed?

  No, I’m not that kind of person. It was just too stressful for me to get up in the morning and pound the pavement. I couldn’t believe that after having a successful career in New York, I couldn’t even get a hint at a job offer. I was so desperate that I even went to insurance companies to interview for sales jobs.

  Sounds as if that is a job you would have hated.

  Absolutely, but I was desperate. I would have taken anything. I needed money to pay my mortgage, and I didn’t want to ask my family for help.

  What was your wife’s attitude during this ordeal?

  She was pretty positive. She felt we would come up with something.

  Did you run out of money?

  We did. Then after we had been there for six months, my wife got the first job, a retail sales position at J. Crew, which was a large step down for her after having been a merchandise manager for Liz Claiborne. She also had reached the point where she was willing to take virtually any job. We had just run out of money that month, and she used her first paycheck to pay the mortgage.

  Were you panicking before she got her job at the last minute?

  I had given up hope. My attitude was that whatever happens, happens. Take the house. I don’t care. I was very distraught. That’s when I first learned about San Francisco. They’re not impressed if you’re from New York, L.A., or London. It’s not a transient city like New York or L.A., where it is okay to come from other cities and get a job. San Francisco is more of a community. People want to see that you have lived in the area for a while. Now I really appreciate that aspect of the city, but at the time it was very frustrating.

  Do you mean the jobs you were applying for would go to people who were local?

  Absolutely, although there wasn’t a huge slew of jobs anyway. I couldn’t believe that I had gone from a status position to the verge of working at Starbucks. I went to the library and microfiched every financial-sounding company and sent them my résumé. Eventually, I got a call from someone who liked my résumé. “I don’t have a job for you myself,” he said, “but I have a friend who I think might be interested.”

  What about your résumé appealed to him?

  He liked the variety—a combination of financial jobs and artistic interests.

  Before you got that job nibble, I imagine this must have been the low point of your life.

  No it wasn’t. The low point is coming up.
The person who had received my résumé convinced his friend who ran the sales and trading unit for Volpe, Welty & Co., a regional brokerage firm, to give me a shot at an interview. When I arrived at the interview, I had no idea what to expect. He asked me about my background, and I told him what I’ve just told you.

  He then asked me, “How much do you want to make?”

  I added $200 to my mortgage and answered, “$2,500 a month.”

  “How about $4,000?” he asked.

  “That would be good too.” I answered.

  Did he know your predicament?

  No, but he saw the jobs I’d held previously, and I don’t think he felt right offering me as little as I was asking.

  What job did he hire you for?

  I was hired to be an institutional stockbroker, but I had no accounts. I had to cold-call in front of other people, which really got to me. I had gone from being Mister Bond Trader, whom everybody wanted to take out to dinner, to cold-calling no-name institutions to buy our lousy stock ideas.

  When you were cold-calling, I guess a lot of people just hung up on you.

  Absolutely. I used to do waves of calls. I had a list of people to call, and I just put my head down and started dialing. I don’t have an aggressive nature, so I tried drawing people in by just being a nice guy. That didn’t work too well. It was a relentless day-after-day process. It was difficult watching other people doing business while I was making these phone calls, knowing that it was obvious to them whenever someone hung up on me. I would have a five-second conversation, put the phone down, and look around. Then I would have to go on to the next phone call. It was such a demeaning process. I hated it, hated it. I didn’t know when I would ever be able to cover my draw. I couldn’t generate a trade.

  You don’t mean that literally?