What I Learned Losing a Million Dollars

by Jim Paul

  In December 1980 Broderick and I were at the height of our business. We had accounts with everybody who was anybody in the lumber business, so we had a very impressive customer list and an equity run with over $3.5 million on it. We were approached by the new president of another regional firm. He was trying to turn it around and wanted us not only for our customer business, but also for my stature in the industry. If I went with his firm, he would gain some immediate credibility that he was turning this little firm around. So he made us a deal that was just crazy: 50% payout, expense accounts, super neat office, fancy furniture, built-in bar. I literally told him at the time that there was no way he was going to make any money on the deal but he did it anyway. This was probably the zenith of my career. I was making plenty of money, I had good accounts and I was on the Executive Committee and Board of Governors. Life was great.

  With interest rates skyrocketing in 1979 and 1980, the housing market, and consequently the lumber market, felt the pinch. The high interest rates depressed new homes sales, the main market for lumber. Lumber prices plunged and volume in the lumber pit dried up. It went from about 6,000 contracts a day down to 1,000. I don’t care what your market share is; when the market shrinks by that amount, you’ve got problems. There was no longer enough business in lumber futures for me to maintain my lifestyle.

  The Arabian Horse Fiasco

  I figured I could I apply my “money making talents” to other business ventures and maintain my lifestyle. “I know what I’m doing. I’m smart and I have the net worth to prove it.” One of the smartest guys I ever met was Jim Gleasman. He was also one of the craziest people I ever met. He had this knack of being the big picture guy. He was always coming up with grand schemes to make money. In one of his schemes, we were going to buy an island off the coast of South America. It cost something like $2 million. But we were going to leverage the purchase by putting down only $100,000 and borrowing the rest using the teakwood grown on the island as collateral. We were going to harvest the teakwood, sell it, make a fortune and then own the island for nothing. Gleasman was nuts — he was constantly coming up with these ideas. Every week he’d have a new way to make a million dollars. One day he started talking about Arabian horses.

  “You buy these beautiful horses and you breed them and you show them in horse shows and you make a lot of money.”

  “Are you sure that’s right?”

  “Yeah.”

  I never could get a handle on why or how you made a lot of money with these horses. These things don’t do anything. They don’t race or run the steeplechase — nothing. They’re show horses. You walk them around and somebody pays $2 million for this thing that walks around looking pretty. Sounded crazy to me, but Gleasman and I started looking at Arabian horses.

  He came up to me one day and said, “I’ve got it. I found a couple who are getting divorced and they’re selling everything they own in common to settle their divorce decree. They have an Arabian horse we can buy for $22,000.” This was the first number he’d mentioned that I could even think about paying for a horse that didn’t do anything. So we went and saw this horse. His name was Onyx. Onyx was beautiful. Gorgeous. A dark gray Arabian. He had this pedigree and that pedigree, and so on. “Okay, let’s do it. Buy the horse. What’s it gonna cost?”

  The minute you buy one of the things the cash register just starts running. We had to transport it over to the stables, pay for room and board, pay the vet and pay for training. After a few months, it was getting to be kind of expensive. We had something like $20,000 each in Onyx.

  Then one day I got a call from Gleasman.

  “It’s Onyx,” he said.

  “What do you mean, it’s Onyx?”

  “They just checked Onyx into the emergency room of the Ohio State equine hospital.”

  “Ah, god. Now what?”

  “He’s got a rare blood disease.”

  Naturally, we hadn’t insured Onyx yet. We figured that after training him and documenting his pedigree, he was going to be worth more and we’d be able to insure him for a lot more. The S.O.B. ran through another thirty grand before he died. The Arabian horse fiasco cost me about $50,000 before it was over. Here I was thinking I could make money in Arabian horses, and I couldn’t even ride one.

  Soybean Oil Spreads

  I decided to stay away from horses and stick with the markets where at least I thought I understood what was going on. So, as the lumber market dried up, my business changed. I gradually moved my business away from the floor and started handling more speculative customer business from upstairs, trading from a quote machine and doing more general futures business instead of just lumber. I started opening some speculative accounts and getting my lumber accounts interested in trading other markets, too.

  With this change in my business, I needed some help. I knew a lot about the lumber market, but not too much about other markets. An old friend of mine, Kirby Smith, had also joined this regional firm. This was the old “pay someone who knows” routine. I knew Kirby from my days at the other regional firm, and we had kept in touch. I had always been impressed with the depth and breadth of his knowledge of the markets. He just knew stuff that I didn’t know. It was a classic case of “anybody who knows more than I do must really be smart, because I know I’m pretty smart.” Kirby was brilliant; he really knew what he was talking about in a lot of markets, particularly the grain market.

  In the summer of 1982 Smith started focusing on the soybean market. The beans had been in a bear market since 1979. Kirby had this really big thing for soybean oil. (Soybean oil is made from crushing soybeans into oil and meal.) He was talking about how the supply of bean oil was getting tight, there would be a shortage and the price was going to go straight up. Now, all I knew about soybean oil was that it was used to make mayonnaise, and as far as I could see there were plenty of jars of Hellmann’s on the shelf at the grocery store. But, as I said, Kirby was brilliant. He knew all there was to know about this market. Pretty soon I began to learn a lot about it too, and I started following the soybean market very closely.

  In early 1983, we started building bull spread positions in bean oil. (We were bullish, so we were long the nearby month of soybean oil and short a deferred month. If there was a shortage and supplies got tight, the nearby month price would go up more than the deferred month and we would make money.) As always, when I started to believe in something I really believed. I called everybody I knew and told them “our” story about soybean oil and told them to get involved so they could make some money. If you even thought you knew my name, you had bean oil spreads on. I called everybody: my brother, traders, friends, customers. My secretary heard me tell the story on the phone so many times she even opened an account and put five spreads on for herself. The neat thing about these spreads was you didn’t have to put up any initial margin. They were marked-to-the-market at the close of each day so you had to cover any paper loss, but it didn’t require any money to open a position. That enabled us to build up big positions. And I mean big positions. So big, that one day the Chicago Board of Trade called to inform me I had exceeded the speculative position limit of 540 spreads. They made me sell out to the point where I was holding only 540 spreads. So not only did I have on 540 spreads, but there were another 700 spreads among all these other people to whom I had told “our” story.

  Road to Riches

  That summer Pat and I had planned to do something we had never done: take a real family vacation. We were going to take the kids and travel the upper east coast. Things were going so well with business that before we left on the vacation, I went out and bought a brand new Porsche 911 convertible. Then I went and spent $11,000 to rent a forty-five foot motor home for the entire month of August.

  The plan was to leave Chicago, go to Washington, D.C. to visit my brother Terry and then head up the east coast. I had a phone installed in the motor home so I could keep up with the markets from the road. We left Chicago the first thing in the mor
ning Monday August 1, 1983. About lunchtime I called Smith from my mobile phone in the motor home.

  “Hey. What’s the soybean market doing today?”

  “Beans are 20 cents higher.”

  “Great! Why are we up?”

  “A weather report calling for unseasonably hot, dry weather for at least the next ten days.”

  I loved it. While I was on vacation, the soybean crop was going to roast in the worst drought since the Dust Bowl days of 1936–37. I was going to get paid by the market to be on vacation. I thought to myself, “Maybe we’ll go all over the country next year and I’ll just trade from on the road.”

  “What’s the lumber market doing?”

  “It’s limit down.”

  “Ouch.”

  Well, I was up more in the bean oil that I was down in the lumber so I was still up on the day.

  We pulled into my brother’s on Wednesday, August 3rd. The next night some of Terry’s friends came over for dinner. They had just seen a new movie about the commodities markets called Trading Places and they wanted to know all about the commodities markets and the life of a trader. So I stayed up half the night telling them war stories about my experiences in the markets. When they found out about the lumber position I had on that was just killing me, they couldn’t believe I could have such a loss and handle it. I also told them about the killing I was making in the soybean oil market. They were all caught up in the conversation because of the movie they had just seen.

  The next day lumber was limit down. So I called Smith. “See if you can call somebody and find out why lumber is down so much.” He came back with a story that some huge commodities fund was liquidating a large position to keep from taking delivery of lumber. “Well, okay,” I thought to myself, “that’s no big deal. The market will start back up after this clown gets out of the market.” But the market continued limit down for three days. Limit down for three days on 50 or 60 contracts adds up to real money. I was down about $70,000. Finally, I started asking Smith some intelligent questions like: “What are the spreads doing? Where is the cash market trading? What is plywood doing?” The bull spreads had been deteriorating for about eight days or so, but that day they were starting to turn back around. “Okay. Buy twenty contracts at the market.” With the market turning, I figured I would add on to the position so I could make back the money more quickly. Then we left Terry’s and continued the vacation.

  Well, it turned out the day I bought those last 20 contracts was the low in the market for a while and the market rallied $13.50 per thousand board feet in about a week. Somewhere around Philadelphia I had gotten about $50,000 of the $70,000 back. “Victory, out of the jaws of defeat,” I thought to myself. I was driving down the Jersey Turnpike, drinking Budweiser, talking on the phone, trading commodities and thinking I was the neatest guy in the world.

  Fortunately, the lumber position didn’t force any change in the real position — soybean oil. I’d call Smith a couple of times a day to see how the bean oil market was doing.

  “How’s it look?”

  “Oh, it looks great!”

  “Yeah, I thought so.”

  “Yeah, we’re fine.”

  “Yeah, I wish we could buy some more.”

  We would go back and forth like this with the old “buddy” routine, preaching to the converted. There’s nothing worse than two people who have on the same position talking to each other about the position.

  “How’s it look?”

  “Oh, it looks great. Beans are limit up and so is bean oil. This thing is bullish as hell.”

  “Are they still focusing on the weather?”

  “Yeah, and also that Fed Chairman Volker and Treasury Secretary Regan have launched a coordinated intervention in the currency markets with European central banks to push down the value of the U.S. dollar.”

  “That’ll help our exports and push grain prices up even more, won’t it?”

  “That’s right.”

  After the close on August 11th, the Agriculture Department released a crop report indicating damage to the crop as of an August 1st survey. The market had been up strong for several days going into the report. I called Smith.

  “How’s the market?”

  “Limit down and our bull spreads in bean oil are losing some ground.”

  “Limit down? Why? I thought the report was bullish, didn’t you?”

  “Yeah, but hurricane Alicia has moved into the Gulf of Mexico and the market thinks the rains from the storm will help the crop in the Mississippi Delta.”

  “That’s the stupidest thing I ever heard. Alicia isn’t going to spawn gentle spring showers. Those storms are going to be so violent they’ll probably rip the soybeans right out of the ground. I think the market should be up.” The market was limit down again the next day and the bull spreads in oil lost some more ground.

  One of the oldest rules of trading is: if a market is hit with very bullish news and instead of going up the market goes down, get out if you’re long. An unexpected and opposite reaction means there is something seriously wrong with the position. Two consecutive limit down days following the release of a supposedly bullish government report does not indicate a strong market. Faced with that situation, what did these two bold and committed traders do? Get out or confidently hold onto their position and opinion? That’s right! We decided the market was wrong, and we were not going to let them get us out of this great position. Within days the market turned and was moving our way again. Break the rules, maintain your conviction and reap the rewards. Our courage under fire was about to be rewarded.

  The evening of Wednesday, August 24th we pulled into Larry Broderick’s lake house just outside of Cleveland. We were wrapping up the vacation and I wanted to be back in the office the following Monday. Larry and I got up the next morning, went into his office in the house, made some phone calls, watched the markets a little bit and then went out onto the dock. At the end of the dock he had a quote machine, a phone and a little refrigerator. We were sitting out in the sun on the last Thursday in August 1983, watching our market positions, drinking a beer and thinking life couldn’t get any better. But it did.

  Monday, Tuesday and Wednesday of that week the bean oil market had closed limit up so the spreads hadn’t made or lost any money for us. But on Thursday the spreads started to trade. The September bean oil that we were long went up 150 points, and the January month that we were short went up only 80 points. The contracts further out closed lower on the day. The bull spreads were working like a charm. At the end of the day, I had made $248,000. In one day — a quarter of a million dollars!

  Now, remember that all the people I knew in the whole world had these bean oil spreads on. My secretary made $2,400 that day. (That’s real money when you’re making $35,000 a year.) Broderick made almost $50,000. Including all the people I had told about this bean oil trade we were up almost $700,000 in one day. I was getting calls from all over the country telling me how great this was and how smart I was. And I agreed, “Yes, I am so smart. But this is just the beginning. This bean oil market has a long way to go, and we are all going to get rich.”

  I also heard through our contacts in the market (since now we were pretty big players in the bean oil market) that it looked like the primary guy on the other side of this trade from us was none other than the legendary trader, Richard Dennis. (Richard Dennis, dubbed “The Prince of the Pit,” borrowed $1,600 from his family in 1970, bought a seat at the minor league Mid-America commodity exchange for $1,200 and ran the remaining $400 into a reported $200,000,000 over the next 15 years.) “Ohhhh,” I said. “That’s good news. We’re gonna take out Richard Dennis. We’ll go down in trading history as the guys who took out Rich Dennis. Can you stand it?” Not only were we going to be rich, we were going to be famous, too.

  The Death Knell Phone Call

  The high from “being right” the market and making all that money is unbelievable. It cannot be duplicated with dr
ugs. You are totally invincible. You are impervious to all pain. There’s nothing bad in the world. It’s literally like you expect God to call any minute and ask, “Is it okay if I let the sun come up tomorrow morning?” And after thinking about it for a minute you’ll probably say, “Yeah, go ahead.” I called Smith and we mutually congratulated each other on our wisdom and knowledge, and for all the money we were now going to make — not the money we had made, but the money we were going to make. We immediately accepted the money we had made and assumed that it was in our bank accounts. It was ours. We weren’t even saying, “Isn’t it neat that we made an unconscionable amount of money today?” That was a given. We were talking about all the money we were going to make. That day simply confirmed that we were right. I’ll never forget going into Larry’s house that afternoon and picking up a copy of The Robb Report. Originally a magazine that listed used Rolls Royces for sale, it grew into the magazine to list ridiculously expensive things for sale: real estate for $5,000,000 and up, hunting lodges, estates, whole islands for sale. Everything in this magazine was the most expensive of its kind. If it were selling pens, they’d be priced at $500 each.

  There was a section on motor homes and the Rolls Royce of motor homes was a thing called a Blue Bird Wanderlodge. I was sitting in the house, looking through The Robb Report and honestly thinking about buying a $400,000 motor home. Why would anyone spend a half a million dollars for a bus? You’d have to be nuts. I was nuts! I was really thinking about buying this bus.

  Friday morning I got up, went straight to the quote machine and sat on the edge of my seat moments before the market opened saying, “Come on guys, open this sucker. Let’s get going. I want to make some more money.” I literally assumed I was going to make more money. The question was not whether I was going to make money. The question was how much money was I going to make. There was a total presumption of success; what had gone before would continue.