What I Learned Losing a Million Dollars

by Jim Paul

  “What do you mean? What are you going to make in your first year in Cincinnati?”

  “Well, all I have to do is $100,000 in gross production and I’ll make at least $25,000. Plus, you know Larry Fitzgerald is going to give me a bonus if I do $100,000 my first year. I’ll probably make 26 or 27 grand. So why would I want to come to New York for 23 grand when I know the odds are —”

  “Wait a minute! You’re going to do a hundred grand your first year?”

  “Well, yeah, I think so.”

  “But aren’t you going to be working for Cohan?”

  “Yes sir, but he can’t handle his book. His book is huge. I’ll take what he can’t get to. I think I can gross $150,000 out of his book in my spare time.”

  “Okay. I’ll offer you $27,000.”

  “$30,000.”

  “Get out of my office.”

  “I went a little too far?”

  “Yep. You went a little too far. Get out of my office.”

  “Mr. O’Hare, it’s been a pleasure. I hope you have considered it a pleasure. I’ll talk to you in a year, and we’ll see who was right. I won’t forget; please don’t you forget, because, honest to God, I am flattered that you invited me in here and offered me the job.”

  I did $162,000 my first year; one of the highest production figures a rookie at the firm ever did. I called O’Hare and said, “I am LOS-2 (length of service, 2 years) as of today. Go over and check your little machine. You’re going to find I did $162,000. I was right, and you knew I was right. Plus, Fitzgerald gave me a little kicker; I made 26.7% out of that $162,000. I made $43,000 in Cincinnati, which spends a lot better than $27,000 in New York. Would you like to re-open negotiations? I’m now $50,000 offer.” He laughed and said, “No. I’ve gotten someone who may not have the chutzpah you do, but he’ll do just fine for $28,000.”

  3

  Wood That I Would Trade

  A year after I started working for Cohan the firm decided to start something called regional trade units. The home office told us that if we were going to be in this region and do futures business, we had to be in Cleveland. I believed them. That was a mistake. I should have stayed with Ed Cohan. Unfortunately, he didn’t tell me that was possible until it was too late. Cohan was the proverbial 500 hundred pound canary; he could do whatever he wanted. If he had told the higher-ups that he wanted me to stay, I would have been able to stay. He was a great guy, but he wasn’t aggressive. He didn’t say, “Hey Jim, you don’t have to do that. You can stay and work with me,” so I figured I had to move to Cleveland.

  I was flattered to be invited to interview for a job in the regional trade unit, considering that I was a 24 year-old with only one year of experience. I was offered a position in Cleveland, and I took it. The deal was: all the stock brokers in the region would refer their futures business to two other futures brokers and me and take a split of the commissions. I moved to Cleveland in May 1970 and did a lot of business my first year, most of it in lumber. I developed a good client base and contacts in the lumber industry. One day our little group, which had grown to five from three, did more business in futures that all of the 112 stock brokers in the office did in securities, combined!

  Between knowing Cohan, teaching in New York and producing some of the firm’s best LOS-1 figures ever, I was pretty full of myself. I continued to believe that I was different and better than the run-of-the-mill broker. Believing I could bend or break the rules led me to do something really stupid — not illegal, just a little ahead of its time and more than just a little against firm policy. One of my customers had a trading system, and he wanted to manage some outside money. He proposed that I raise $30,000 and put it into an account. He would trade the account, take no fees and split profits and losses fifty/fifty with the customers who had put up the money. This sort of arrangement is done all the time today and usually under terms much less advantageous for the customer. Today there are usually fees, and no money manager shares in the losses.

  So I raised the money and informed the customers exactly what we were doing, and they signed papers agreeing to the terms. I even documented the arrangement with the state securities authorities by registering the account as a limited partnership. But I opened the account as an individual account, which it really wasn’t.

  Well, the guy made money for a while but then he started losing money. After he lost $20,000 of the customers’ money, I started getting antsy and said, “Okay, no big deal, but you need to put up your half of those losses: $10,000.” He sent a check. The check bounced. Naturally, that caught the attention of the operations manager. The long and short of it is that the trader lost the original $30,000 and $20,000 more. He couldn’t, or wouldn’t, pay the $20,000 owed to the firm and I got fired. I was terminated “for cause,” which is a big no-no as far as the New York Stock Exchange is concerned. I got blackballed. I couldn’t get a job anywhere. Soon after that the firm collected the money from the client, but a fat lot of good it did me by then.

  So I called my friend Jack Salmon, who by then was the president of the regional brokerage firm he was working for when I met him back in college. I hadn’t had a job for three months, and I really didn’t want to go to work for a regional firm. But you gotta do what you gotta do. I still had a client base that I thought I could move. ‘‘I’m sure I can move the lumber accounts. Do you know any firms where I could take my business?” I said.

  “Come to work for us,” he said. “My Cleveland office could really use your talents. I’ll pay you 50% of gross. Plus I’ll pay you a 5% override on the whole office.” My previous employer had only paid me 25% of gross so this was a great deal if I could continue to do the business. Sometimes, knowing the right people and being in the right place at the right time can make all the difference in the world. I went to work for Salmon in a tiny four man office in Cleveland. Most of my accounts transferred over, so business was back to normal fairly quickly.

  I made good money between January 1973 and July 1976. All the commodity markets got hot when Nixon took us off the gold standard in 1971, and the grain markets went crazy in 1973 and 1974. My clients were making money and I was making money. I bought a house and a sports car. I went to the managers’ meetings, and I was honored as the leading manager based on production improvement. Once again, I encountered the Midas touch syndrome; everything I touched turned to gold. I didn’t think things could get any better than that, but they did.

  Chicago

  The only commodity exchange membership I had ever wanted was one that would enable me to trade lumber without having to pay for the right to trade all the other commodities which came with a full membership. In 1976 the Chicago Mercantile Exchange created exactly that kind of membership. Leo Melamed, Chairman of the CME at the time, came up with a brilliant gimmick to pay for the new Merc building by selling equity in the exchange without diluting the full memberships. He created a Non-Livestock-Membership (NLM) that permitted you to trade lumber and eggs. The NLM seat cost $20,000 compared to the going rate of $125,000 to $150,000 for a full membership at the CME or the Chicago Board of Trade.

  I called Jack Salmon and said, “This is it! I want to move to Chicago. There’s really no one in the office here in Cleveland other than me anyway, so let’s bag this thing and I’ll move to Chicago.” I bought the seat and moved to Chicago in June 1976.

  I wanted to dress for success for my new job in Chicago. An old fraternity brother of mine, Jimmy Showalter, had a men’s clothing store in Lexington, Kentucky. Jimmy’s store had nice clothes: Hickey Freeman kind of stuff. Not Armani, but very nice. I called him and asked if I could come into his store on a Sunday when he was closed and deck myself out in a new wardrobe. “Well what are we talking about here, Jim?” he asked me. I could tell he didn’t want to come in on a Sunday just for me. I said, “I’m talking about spending some serious money on new clothes. Maybe $8,000 or $10,000 to have it done right.” Suddenly, Sunday didn’t sound too bad to Jimmy. So I flew to
Lexington and got a new wardrobe.

  When you buy a seat on the exchange, you get to select the call letters that will be engraved on your J.D. badge that other traders use to identify you when they trade with you in the pit. You want to stand out in the crowd so traders will trade with you often. Some people use their initials, nickname or some catchy combination of letters that makes them easy to remember. In my case, since I was always looking for whatever edge I could get, I picked the initials LUCK. I’d rather be lucky than good anyway. I thought by calling myself lucky maybe I’d be lucky, plus it was very easy to remember. Everybody knew who LUCK was. It was a badge that people could instantly identify with and remember.

  Learning the Trading Floor

  Very quickly, it became obvious to me that the best trader in the lumber pit was a guy named Stu Gimble. He was head and shoulders above everybody. Just like at the country club when I wanted to ingratiate myself with the movers and shakers, I wanted to get to know Gimble. So, not knowing any better (just like when I got my pledge pin), I walked up to him one day and said, “Stu, can I take you to lunch?”

  “I don’t go to lunch.”

  “Can I take you to dinner? Can I take you for a drink? Look, you can call it anything you want, I just want to go out and talk with you. You’re the best trader in the pit so you’re the man I gotta talk to.”

  “Okay, we’ll go to lunch.”

  Once again, I set myself apart from the rest of the crowd by getting to be friends with Stu Gimble and another phenomenal trader on the floor, Joe Siegel. Joe moved around mostly in the pork bellies and the lumber pits. I learned a lot from the two of them. I still think Gimble was the best mechanical trader ever on the floor.

  Life in the Fast Lane

  As part of this new Non-Livestock-Membership the Board of Governors of the CME decided to have two new governors from the NLM Group on the Board. There was a nominating committee to choose four people from the NLM Group to run for those two spots, and I was approached and asked if I’d be interested in running for the Board. I guess I looked gubernatorial wearing these fancy-schmancy clothes to the floor. The dress code for the floor was a tie and your trading jacket — no jeans or tennis shoes. Everybody else was wearing khakis and corduroys and I was walking around in $600 vested suits. I’d have my trading jacket on over a vest and a $50 tie. I was well dressed for just about any business environment, but on the floor I was extremely well dressed. Once again, I thought I was a little different from, and a little better than, other people.

  The idea of a contest for a Board of Governor’s seat was flashing “game” to me. It was like freshman English, mind games in the military and the MSV test. I said, “Sure, I’d love to be a candidate.”

  Now, what do you do when you’re in high school and someone asks you to run for student council? You say, “Sure.” But then you don’t run; you anti-run. Everything is done to de-emphasize it because you don’t want the embarrassment of trying and losing. So I said to myself, “Self, whether you lose because you didn’t run for the Board of Governors or whether you lose because you ran hard, it’s the same outcome. So let’s really run hard. Let’s get aggressive and try to get elected. And if you don’t get elected, you don’t get elected. Big deal.”

  I did everything I could to get elected. I sent platform letters. I had Jack Salmon send letters. Then I sent hand-written letters asking for votes. Well, nobody else was really running. They were all doing the “I don’t want to run because I don’t want to lose” routine. If you run aggressively in that situation, you win by a landslide. I won 121 votes out of 150 votes.

  I was elected to the Board of Governors of the CME after only six months in Chicago. I was 33 years old, looked like I was 25 and acted like I was 22, but I was on the Board of Governors. After the election, Leo Melamed came up to me and said that I would also represent the NLM on the Executive Committee of the Board of Governors since I had the most votes in the election. It turned out the Executive Committee was where everything really happened. Anytime you see a committee of more than ten, it isn’t the real committee. There’s a sub-committee somewhere making the decisions. So the Board at that time was eighteen members and the Executive committee was six. I couldn’t believe I had just been elected to the Board of Governors, and I didn’t even know the Executive Committee existed. But suddenly I was on it. I had only been in town six months, and I was elected because I had presence, wore a vest and $80 shoes, knew a lot about the markets and knew a lot of people in the industry.

  Through a series of chance occurrences, I became a player in the cradle of the futures industry. All of a sudden I was in the inner circle. Fortunately, once I got there I wasn’t bad at the game. I played by the rules and became very involved in the Exchange and the industry. It was a very heady experience to be an exchange official after such a short time in Chicago and to be friends with the two best traders on the floor after such a short time in the pit. I began to think of myself as one of the “bigger players.” I was going to the floor every day and while most of my trading was still focused on customer business, I was starting to trade more for my own account. I was probably making $200,000 to $300,000 a year and spending a lot of it. I can’t even remember half the stuff I bought. I also made investments that I can’t even remember. My ego was getting fed from all quarters: I was a Governor, a member of the Executive committee and friends with Gimble and Siegel. I was a little different. I was a little better than the rest of the crowd; just like getting my pledge pin in college and the multi-promotion in the military. I remember one morning I was heading out the door on my way to work, and I stopped at the mirror in the hall tree to straighten my tie. I looked at myself, and I said, “Goddamn. Life in the FAST lane.” Life was great and I didn’t think it could get any better. But it did.

  Zenith

  There was another guy at my firm who was also involved in the lumber market. Larry Broderick had come from the cash lumber business and was working in our St. Louis office. Both of us were doing some business with Potlatch, a huge paper manufacturing and lumber firm in the northwest. The Potlatch family had been cutting wood since Noah’s flood, and the guy who ran their trading operation was a guy named Tom Tomjack. One day Tomjack called me and said, “This is stupid. We’ve got you doing your thing in Chicago and Broderick doing his thing from St. Louis. You guys ought to be working together. Why don’t we all get together have lunch and talk about it?”

  When we met him on the west coast for lunch, he said, “Look guys, together you two would make the best single broker in the business. Why don’t you figure out a way to work together and stop being two independents.” So we did. We became partners, and very shortly we started doing a lot of business because the arrangement really worked. Larry had fantastic connections in the cash market and I great floor information and execution services.

  I was walking into the lumber pit every day with big orders. “Buy 50 of this. Sell 100 of that.” When you start doing size like that in the pit, it can really do to your head; the other people in the pit don’t know whether the orders are for your account or for a client’s. It also makes it very easy to start trading that kind of size for your own account. I was the biggest broker in the pit in terms of doing size orders. Larry and I had a large percentage share of the market. Lumber volume was something like 3,000 or 4,000 contracts a day and we were doing 600 or 800 contracts a day between client and personal trading. At 6’3” with a booming voice and 100 lot orders, I became a presence in the pit.

  So not only did I think I was neat, but a lot of other people did, too. I thought I was different and somehow better than other people; like I had some sort of Midas touch. I might have thought it was true, but it wasn’t. Little did I know that all the times I thought I was good, I had only been lucky. For example, when I was sent to Korea and became an S-3 as a 2nd Lieutenant was it because I was good or lucky? Lucky. Everyone else was sent to Vietnam so there was a personnel shortage in Korea. When I happen
ed into that brokerage the day after Cohan’s assistant quit, was it because I was good or lucky? Lucky. When I became a Board Governor and Executive Committee member after only six months in Chicago, was it because I was good or lucky? Lucky. The successes in my life had given me a false sense of omniscience and infallibility. The vast majority of the successes in my life were because I got lucky, not because I was particularly smart or better or different. I didn’t know it at this point in the story, but I sure as hell was about to find out.

  4

  Spectacular Speculator

  Timber Tumbles

  I will never forget the first day I made $5,000 trading. I felt exactly the same way I did the first day I made $5 caddying when I was ten years old. To make the five bucks, I caddied all day long. I made $5 for ten hours of carrying a golf bag. Fifty cents an hour. It was the greatest feeling in the world. Then there was the first day I made $10,000. Same feeling. Then the first day I made $20,000, and so on.

  I remember one Thanksgiving I was at home in Kentucky with my folks and my brother. The Friday after Thanksgiving my brother and I flew to Chicago so he could see what I did for a living. I was long the lumber market and losing about $40,000 or $50,000 on this position when we arrived in Chicago. We went into the lumber pit and I explained how everything worked. Then to demonstrate how things worked, I bought 10 contracts. The market went down and I bought some more. After a little while the market turned and roared to the upside and I bought it all the way up. We walked out of the pit with $37,000 in an hour of trading. It was just one of those days when the market was going to go up because I was buying it. Some days you just can’t do anything wrong. Including all the money my customers made that day plus all the commissions I generated, we made about $100,000. And it felt just the same as the first day I made $5 caddying.