Pit Bull
Lessons from Wall Street’s Champion Trader
Martin “Buzzy” Schwartz
with Dave Morine and Paul Flint
To all of my family, especially my wife, Audrey, who embodies the essence of life
“How long can you stay at the top?”
—Sir Edmund Hillary
Contents
Epigraph
Acknowledgments
1 Trade or Fade
Mashed Potatoes
2 The Plan
The Grubstake
3 Paradise Island
Viva Las Vegas
4 The Great Pyramid
Inside Skinny
5 Auric Schwartz
Going for the Gold I
6 Made to Trade
Switch Hitting
7 Never Short a Republican
The Losing Streak
8 Champion Trader
Honor Thy Stop
9 Little Brown Bags
To Thine Own Self Be True
10 Lots 204 and 207
Big Shots Make Big Targets
11 Going for the Gold II
Sitting Down by the Lake, Waiting for the Tidal Wave
12 Commodities Corp
How I Read the Wall Street Journal
13 Sabrina Partners
14 How’s My Money Doing?
Sorry, Dad, You’re Fired
15 Down the Tubes
Two Lessons for Life
16 Night Fighting
Money Talks, Bullshit Walks (aka Early in the Day, Early in the Week)
17 The Best Trade
The Pit Bull’s Guide to Successful Trading
My Typical Day
Searchable Terms
About the Author
Copyright
About the Publisher
Acknowledgments
I would like to thank my family for their universal support and encouragement throughout my life. To my parents, who oftentimes sacrificed greatly to give me the best education and a loving and honest home. To my brother, Gerry, who spent many hours teaching me to be a better athlete and a better person. To Pappy Snyder, who represented the epitome of optimism and left me with the legacy of his journal to continue the “story.” To my wife, Audrey, who is the rock of the family and able to demonstrate great humanity and wisdom. To my children, Stacy and Bowie, who teach me how rewarding and challenging it is to be a good parent.
To Dave Morine who had the vision and skill to bring me through this project. To Ruth Morine for her constant cheerful encouragement. To Paul Flint for his marvelous intellect and good humor—once a Marine, always a Marine. Semper Fi. To Jim Levine, my agent, Amherst classmate, and friend, for his patient guidance and professional skills. To Morgan McKenney, my superb assistant, for her energy and drive in helping me finish the last chapter, “The Pit Bull’s Guide to Successful Trading.”
To all of the people at HarperBusiness for their help in bringing this project home—you are all first-class. To Adrian Zackheim for gambling on a first-time author and seeing the project through. To Dave Conti for his superb editorial skills—your suggestions made the book much better. To Lisa Berkowitz for her marketing skills and promotional contacts. To Janet Dery, Maureen Kelly, and Amy Lambo for making this project easier.
To all of those unnamed people who have taught me so much both good and bad along this journey that is called life.
Thanks,
Buzzy
1
Trade or Fade
Three Bid for Ten, Three Bid for Ten, Three Bid for Ten. I kept saying it over and over in my mind like a mantra. If Mesa Petroleum hit 625/8, I was going to try and buy ten October 65 call options at $300 per option. Each option would give me the right to buy one hundred shares of Mesa stock at a “strike price” of $65 per share any time up until the third Friday in October, the expiration date of the call option. This was going to be my first trade from the floor of the American Stock Exchange and I was scared to death that I was going to screw it up, that I wasn’t going to be able to hack it as a trader.
It was Monday morning, August 13, 1979, and Trinity Place was bustling with men in business suits heading to work. New York’s financial world was preparing to start another day. I stopped outside the entrance of the building marked 86, took a deep breath, pulled out my badge, and for the first time walked through the door that said “Members Only.” The guard looked at my badge, saw that it said “Martin Schwartz & Co., 945,” nodded a good morning, and let me in.
I turned left down the stairs to the coatroom. Members were lined up at the counter, exchanging their sport jackets for their blue smocks, the official garb of the American Stock Exchange. Since it was my first day, I didn’t have a blue smock, so I had to introduce myself to Joey Dee, the attendant, and give him my badge number, “945.” I put on my smock, pinned on my badge, and checked to make sure that I had my pen. Men in blue smocks were sitting on benches all around me changing their shoes, putting on crepe soles and shoving their leather ones into the cubbyholes that lined the walls. I couldn’t find a seat so I decided to change my shoes later. Having crepe soles was the least of my worries.
I went upstairs to the members’ lounge to await the opening. Walking into the members’ lounge of the American Stock Exchange was not like walking into the Harvard or Yale Club. The cloud of smoke that hung over the room came from cigarettes, not pipes; the furniture was covered in Naugahyde, not leather; and the members were mostly Irish, Italians, and Jews, not WASPs, or at least WASPs who had gone to the right schools. These guys were the B team of finance, the direct descendants of the Curb Exchange, the group of bootleg traders who ran their books on the streets outside the New York Exchange from the 1890s until 1921.
I made myself a cup of tea and walked out onto the floor. The morning light streamed through the enormous windows that take up almost the entire wall on the far side of the Exchange. It’s a huge room, about three-quarters the size of a football field and easily five stories high. The floor was set up a lot like an indoor flea market. Specialists, guys named Chickie and Frannie and Donnie, the people who made the market on specific stocks and options, were perched on metal stools in front of horseshoe-shaped racks of pigeonholes going through their orders. There were different pigeonholes for different stocks, options, expiration dates, strike prices, day orders, market orders, whatever. The other members, the traders and brokers, were wandering around, pens and tickets in hand, getting ready to buy and sell.
Above, in the balcony, which was suspended over three sides of the floor, representatives from the brokerage houses sat in tiers, checking their phones and spotting their runners on the floor. Between them, on the near wall, spectators were beginning to file into the visitors’ gallery. Holding everything up were huge Roman columns with bulls and bears sculpted on either side and binding it all together, like the ribbon around a huge box of candy, was the big Trans Lux ticker tape. The tape ran along the walls blinking out the prices of all the stocks while just above it the Dow Jones wire flashed the latest news. Even though the Exchange had yet to open, all eyes were darting around searching for quotes and other bits of information that might give them an edge.
Precisely at ten, the bell rang and everyone started moving. They reminded me of horses breaking from the gate, except now I was part of the race. I galloped over to the far corner where Mesa options were traded. A noisy little crowd of blue smocks was gathering around Louis “Chickie” Miceli, the specialist. The specialists for stocks and options on the Amex were responsible for maintaining orderly markets. As the specialist for Mesa options, it was Chickie’s job to facilitate buy and sell orders for other brokers and to trade for his own account, constantly adjusting the market price so that the supply matched the demand.
“Chickie!” shouted a broker from Merrill, “How are the Oct 65 Mesa calls, Chickie?” He was coming in from the edge of the crowd with a public order.
“Three to a quarter, fifty up,” Chickie said. I had to work through in my mind just what they were saying. Chickie would buy up to fifty October 65 Mesa options at a price of 3 and sell up to fifty at a price of 3¼. Since an option represented one hundred shares of stock, that meant that at this moment I could buy up to fifty options for $325 per option. Each option would give me the right to buy one hundred shares of Mesa stock at a price of $65 per share at any time between now and the third Friday in October. I was betting that before then the price of Mesa would go up, making my options more valuable. But 3¼ was too much. I was willing to buy ten options at 3, for a total of $3,000. The mantra kept ringing in my head, “Three Bid for Ten, Three Bid for Ten.”
“Three and an eighth bid for ten,” barked Merrill.
“Sold,” yelled a guy from Hutton. The Hutton broker had hit the bid from the floor. If he hadn’t, Chickie, as the specialist for Mesa options, could have hit the bid at 31/8, or could have placed it on his book. I wished that my ear was attuned to the language of the floor. That would come with time, I hoped.
I checked the quote screen above Chickie’s head. Mesa had opened on the New York Stock Exchange at 627/8. I nudged my way further into the crowd. Elbows dug into my ribs as other traders jockeyed for position. I wormed in as close as I could. Chickie had a phone cradled to his ear checking on how Mesa was running on the Big Board, the New York Stock Exchange (NYSE).
Tick. The quote above him changed to 625/8.
The crowd started to come alive. Mesa was moving. “Three Bid for Ten, Three Bid for Ten,” I mumbled to myself. I cleared my throat. “Hey, Chickie. How many Oct 65 calls offered at three?”
“Thirty offered at three, Newboy.”
“Three bid for twenty,” someone next to me yelled.
“SOLD! Twenty at three,” Chickie said.
“How many now at three?” I said.
“Ten offered at three.”
“Er, um, ah…”
“What’ll it be, Newboy, trade or fade?”
This was it, trade or fade. Buying a seat on the American Stock Exchange was the keystone to the plan I’d formulated twelve months earlier. The plan had been the result of my marriage to Audrey Polokoff. Unlike most of the women I’d known, Audrey saw that I had some potential, but she also knew that I’d spent the last decade pissing it away. “You’re thirty-four and you’ve always wanted to work for yourself,” she’d told me. “Make that your goal and go do it. You’ve got a good education. That’ll always stay with you. The worst that can happen is that you’ll go bust and go back to doing what you’re doing now, being a securities analyst.”
The market was moving. People were crowding in closer, the noise level was beginning to rise. Chickie had the phone glued to his ear. He was getting ready to change the bid. If my information was right, he’d be moving it up. I was going to miss my trade.
“THREE BID FOR TEN!” I shrieked.
“SOLD! Ten at three.”
The trade was in. I pulled out my order pads and my pen. “Black to buy, red to sell,” I muttered to myself, “don’t screw it up.” I wrote out my order and looked for the clerk. His job was to take the order and process it. One copy for me, one copy for Bear Stearns, whom I was using for my clearing firm. Clearing firms are bean counters; they run trades through the Exchange accounting systems and provide traders with daily profit and loss statements.
I took out the pen with my seal taped to the top and stamped the ticket “945.” There, it was official, my first trade was done. Then I eased out of the pack and waited for Mesa to start ticking up.
It was only 10:30, but my blue smock, starchy clean when I’d put it on an hour earlier, already had circles of sweat under both armpits. I felt exhausted, there was a pain in my lower back and my feet were starting to hurt. My leather soles felt like lead. I would have sat down, but there was no place to sit. That was one of the anomalies of buying a seat on the Exchange. You didn’t get a seat. You got the right to wander around the floor, and as every old-timer knew, you did that in crepe-soled shoes.
The action on Mesa was heavy. Chickie was throwing out bids and offers were flying back and forth. I could hear them, but I couldn’t understand them. I gazed up at the tape.
Tick. 623/8.
Mesa was heading in the wrong direction. Audrey’s words, “The worst that can happen is that you’ll go bust and have to go back to what you were doing before,” flashed through my mind. I didn’t want to go back to doing what I was doing before. For nine years I’d lived on airplanes, bouncing from city to city, meeting with portfolio managers, giving them my views on stocks so they’d give their commissions to my firm, kissing ass. That’s what securities analysts do. They work for the research departments of brokerage firms and spend their time traveling around visiting companies, interviewing managers, digging through financial reports, looking for hot stocks that their firms can recommend to their clients. I was sick of it. When you’re twenty-five, flying around the country big-shotting it up with your friends from college courtesy of your company’s credit card is pretty cool, but when you’re closing in on thirty-five, it’s gotten pretty stale. Your friends are too busy with their own lives, and your parents are beginning to wonder if there’s something wrong with you. They’re the ones who paid the tuition and now expect a return on their investment. They’re the ones who keep asking, “Why aren’t you married? Where are our legacies? When are you going to grow up and get a life?”
Tick. 62¼. Ah, fuck.
All the time I’d been working as a securities analyst, I’d been playing the markets, and all the time, I’d been losing. I was smart, I had a good education, I’d been a winner all my life, so how come I could never make any money playing the market? I couldn’t figure it out. Neither could my family. I was the one that the bets had rode in on, and I was the one still running in last place. Was the Schwartz family history about to repeat itself? Was I about to go tapioca and spend the rest of my life being frustrated like my father?
Tick. 621/8. Still heading south.
My father was the oldest of four children. His parents were immigrants whose families had fled to America to escape the pogroms of Eastern Europe. In the early 1900s, my grandfather became a tailor in New Haven, Connecticut. He stitched and saved, but he never amounted to much. It was my grandmother Rose who had the drive. She owned a candy store and was determined that my father should go to college, that he should become a professional. As the oldest, he was the chosen son, the Moses who would lead the Schwartzes to the promised land, the one who’d deliver the American Dream to all of us.
My father had given it his best shot, but he didn’t have it. He was more like my grandfather than Rose. He’d gone to Syracuse University, but by the time he collected his sheepskin it was 1929 and the American Dream was about to turn into the American Nightmare, the Great Depression. My father, along with millions of other Americans, bounced around from job to job until 1938 when he married my mother. Then, the best job he could get was working for my other grandfather, Pappy Snyder, which was hardly the promised land. After that came the war, but due to his age and two kids, he never served. It wasn’t until 1952 that he finally made his big move. Pappy had retired and my father was out of a job, so he took all of our money, got a second mortgage on our house, and bought a mom-and-pop grocery store on Whalley Avenue in Westville, a suburb of New Haven.
I was only seven, but even I knew it was a bad move. What my father refused to see was that his store was just four doors down from a big new shiny First National supermarket. How he ever thought he was going to compete with the largest supermarket chain in New England was beyond all of us. I remember asking my mother when I was older how she could let him do something that stupid. All she said was, “He was so desperate. I had to give him the chance to fail. Even failur
e was better than doing nothing.”
Tick. 617/8.
At least my father had the Depression. I had no excuse. I had degrees from Amherst College and Columbia Business School. I had been in the marines. I had the experience. I had Audrey. I had it all. What the hell was going on here? Why was Mesa still going down, when I knew it should be going up?
Tick. 615/8. Doublefuck.
What should I do? Should I get out? Should I buy more? It was time to call Zoellner. It was Zoellner who’d gotten me into Mesa.
Bob Zoellner was my mentor, the best trader I’d ever met. I’d run into Zoellner back in 1973 when I went to work for Edwards and Hanly, a small retail brokerage firm. That was right after I’d gone tapioca playing commodities. Right away I saw that Zoellner was a great, great trader. In 1974, when Edwards and Hanly was hemorrhaging money on its retail brokerage operations, he’d almost single-handedly kept the company afloat by shorting stocks and making millions in the firm’s trading account. Going “short” means selling shares of stocks that you don’t own now, but will have to buy back later, hopefully at a lower price. Nobody was better at it than Zoellner.
I grabbed one of the phones that are scattered around the floor of the Exchange. I dialed for an outside line; the operator asked for the number. Zoellner was over in Jersey. What the hell was his number? 201-something. My mind had gone blank. I mumbled some numbers and the phone rang.
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