Pit Bull

by Martin Schwartz

  “Sure,” I said. “It looks like the market discounted the results of the election today, so there won’t be much happening tomorrow. You take tomorrow off. You go with your mother and get yourself a nice warm coat.”

  The next morning I eased into the big leather seat of my gray Eldorado and drove to work by myself. Both the Republicans and Democrats were claiming victory. It was going to take a while to figure out what really had happened, if anything, to the balance of power. To me, it looked like more of the same, and I wasn’t expecting to see any big bulls or big bears come out of the woods.

  Stocks started off mixed, but bonds were rallying, and the S&P futures opened at 139.20, up 0.35 from Tuesday’s close. Investors must have been convinced that with the election out of the way, the Federal Reserve would lower interest rates. There had been speculation that the Fed was going to lower them on October 25, and when they hadn’t, in deference to the election, the market had plunged 36.33 points, its second largest fall in history.

  I kept an eye on the news services. Economists were predicting a cut in the discount rate, so I went long on fifteen S&P contracts, but I was very tentative because all of my indicators still said the market was overbought short term and who knew about the Fed? I leaned back to say something to Audrey and realized that she wasn’t there. I was hoping that she’d call in, but there wasn’t much chance of that. When Audrey got with her mother, there was never any time to think about me.

  At eleven, I began to get real edgy. The market was running up without stopping to look back. I could hear the noise level out in the bullpen beginning to rise. “Holy shit. Somebody’s lit a rocket under Northern Telecom.” “IBM’s moving. It’s time to get on the Big Blue train.” “Look at Electric. Look at the brokerage firms. Even Ma Bell is ticking up. Look at everything, it’s all moving; technology, brokerage, transportation.” “The tape’s running late.” “Give me a quote, you shithead.” “Fuck the quote, buy me five thousand AT’T at the market.” “Get me some Teledyne calls.” “Digital is flying.”

  I checked my Quotron and saw that the market was surging. What should I do? “It’s like yesterday,” I said. “It won’t last. My indicators say that the market’s overbought. It’s gotta drop back. Audrey, what should I do?” There was no answer. I’d said it, but Audrey wasn’t there to tell me whether or not I meant it.

  I got on the phone and started selling December S&P 500 futures. “Debbie. Yeah, honey, things are moving, but it can’t last. What’s the quote? 139.20? Dump those fifteen contracts I bought this morning and sell fifty more short.” The market kept rising. Just after noon I went short another twenty-five contracts at 140.05, and at 1:10 P.M., another twenty-five at 141.40. Then at 2:00 P.M., the market started to back off a little. “Debbie, what’s the quote? 140.95. Excellent. I knew it was overbought. Sell fifty more.” By 3:30, things were totally out of control. The market had suddenly got a second wind and was surging.

  According to my Telerate, the cash bonds were on the fly. The S&P futures had locked limit up at 143.85. There was a rule that the S&Ps could only move five points either way in a day, and once they reached that point, they locked at that price and couldn’t be traded above the limit until the next day unless there were offers at up limit or bids at limit down. I sat there cursing Audrey and her mother. How long did it take to buy a fucking mink coat?

  The more I stewed, the more I convinced myself that I was right. I looked at the Telerate again. The bonds were still rising. But so what? The market couldn’t keep going up. It was overbought. At 3:47, twenty-eight minutes before closing, I got on the horn to Debbie. “What’s the quote? What’s the quote, dammit.”

  “Marty, the market’s still locked limit up at 143.85.”

  “Sell another fifty.”

  “Into the locked limit?”

  “You heard me. Don’t give me any shit, just do what I tell you.” I’d lost it. If Audrey had been there, she would have been slapping me on the side of the head telling me to stop because selling contracts at the lock limit was more than stupid, it was just completely, totally, undeniably, and unbelievably self-destructive. Why didn’t she call? Didn’t she care that I was getting killed? Why wasn’t she there to say, “Buzzy, just listen to yourself. What are you doing? Stop selling and cover those positions, NOW!”

  What made it even worse was that I had another indicator staring me in the face, one that was totally reliable, yet I completely ignored it. When the boys in the New York Stock Exchange saw that the boys in Chicago were going to eat their lunch with the S&P 500 futures, they’d created their own meal ticket, the New York Futures Exchange. While they never achieved the volume of the S&Ps, the NYFE, the “knife,” which was based on the value of the New York Stock Exchange Index, was for all practical purposes the same as the S&Ps. The NYFE’s traded at about a 4:7 ratio with the S&P; if it was up four points, the S&P was up seven. Normally I paid no attention to the knife, because it was peanuts compared to the S&Ps, but now with the S&Ps locked limit, it was doing what they would have done if trading hadn’t been halted. If Audrey had been there, she would have taken the knife and cut my trading off cold. But she was out buying a coat with Sally Polokoff.

  At 3:58, according to my Quotron, the knife was up 4.05 and because it sold at lower volumes and lower prices, it hadn’t locked limit. Despite this fact, I sold another fifty S&P futures, just to show them who was King of the Pits. That meant that the S&P was really up about seven points (to 145-plus), yet here I was selling fifty more into the locked limit at 143.85. I was immediately losing $1,000 per contract, or another $50,000. What a schmuck!

  I have what I call my sunspot theory, which says that 2 percent of the time, you become uncontrollably irrational. This was one of those times. I had the facts on the screen in front of me, but I refused to believe them. “The knife’s a less liquid exchange,” I was screaming. “Fuck it, it can’t be right.” Of course, it was right, and I knew it. But where was Audrey to tell me I knew it? Out buying a coat with her mother, Sally Polokoff. This was really starting to piss me off.

  When the market finally closed, I was short 250 S&P contracts. I couldn’t believe it. I was in a daze as I packed up my briefcase, put on my coat, and headed for the door. Ray Gura, one of the guys in the bullpen, was still at his desk settling up his trades. “Hey, Marty,” Ray said, “how about this market? Up eight percent in just the last three days and 43.41 points today? Largest jump in history, you musta made a killing.”

  “Yeah, Ray, it was a big day.” Ray was a good guy, an old Yankees fan. He was older and more polite than most of the other guys and was always very respectful of Audrey.

  “I thought for sure we’d see you dancing on the desks today. Say, Marty, you all right? You don’t have any color. You don’t look so good.”

  “Yeah, I’m fine, Ray. I just had a tough day.”

  “Hey, Marty, what’s tough about makin’ money? I’ll take forty-three points any day.”

  Not if you’re on the wrong side, Ray. The drive home was the longest of my life. I’d never lost so much money. I’d never conceived of losing so much money. I figured that when my account was marked to market, I’d be down around $600,000, but because the S&Ps had been locked limit up for the last half hour and the knife had kept moving up, I’d be even deeper in the hole when the market opened the next morning. How could I have done it? How could I have been so stupid? And here I thought I was a star, a guy that was going big time.

  Another day like today and I’d be back where I was at my tenth reunion; broke, squeezed into the TR6, living in a rent-controlled studio apartment, working as a securities analyst, and voting Democratic. So what if the government mismanaged and wasted my tax money. I needed a welfare state. In my business, you were never more than a couple of sunspots away from the unemployment line.

  “Audrey, why didn’t you call me!” I screamed as I walked into the apartment. “I’m short 250 contracts. We could lose a million dollars.”

 
“Buzzy, relax. You just had a bad day. Tomorrow, we’ll go in and straighten it out. What’s done is done. There’s nothing you can do about it tonight.”

  “A bad day! What, are you shittin’ me?! Audrey, I just blew almost a million dollars in four hours. Why didn’t you call?”

  “My mother and I were busy looking at skins. Wait till you see the coat I’m getting, you’re going to love it.”

  Great. Audrey was looking at skins while I was getting skinned. That’s what always amazed me about Audrey: she never got emotionally involved in my trading. To her, the money was never real. Making it and losing it was just something that I did, and she assumed that when all was said and done, I was going to make a lot more than I lost, even if the loss was a million dollars.

  Audrey wasn’t helping me. I needed to talk with someone who understood trading, somebody who could tell me how I was going to get myself out of this mess. Zoellner.

  “Yeah, Vickie, Marty here…. Yeah, how ya doing? Look, I’m sorry to bother you, but is Bob there?…Yeah, I’ve had kind of a rough day. I’ve gotta talk to him…. Yeah, Thanks…. Bob, Bob, whaddya think, Bob? I’m short 250 S&Ps and I’m dying. What do I do?”

  “Marty, you’re not thinking straight. It’s like we always say, you can’t shift to first gear from reverse without going through neutral. You’ve gotta change direction, you’ve gotta stop the losses. Cover your position, get back to neutral. Once you’re out, things will look better.”

  “Bob, but the market’s gotta turn, all my indicators say it’s overbought. I can’t get out now, it’s gotta turn.”

  “Marty, come on, get ahold of yourself. You can’t outsmart the market. Your indicators are wrong. The market thinks that now that the election is over, the Fed’s going to cut the discount rate. Interest rates are coming down, the institutional investors are going to be switching their funds from the money markets into stocks. Sure, the market might take a dip, but you can’t count on it. You’ve gotta clean out your position. Believe me, take the loss. Remember, your winners are ahead of you, not in back of you.”

  “Thanks, Bob, I know you’re good, I know you’re right, but a million bucks, that’s a hell of a hit.”

  “Marty, you’ve got to take it.”

  I tossed and turned all night. Why was it that just when things seemed to be going right, something always went wrong. A couple of days ago, I felt like Joseph. Now I felt like Job. And what was wrong with Audrey? Didn’t she understand that we were going to lose a million dollars in the morning? How could she be sleeping like a log?

  The next morning, we got in the Eldorado and headed for the office. I was dreading having to go in and cover my position. I was hoping that S&Ps would open down, then maybe I’d ride it for awhile. Maybe my indicators weren’t wrong. Maybe the market would come to its senses and see that I was right, that it was overbought. In any event, I felt better knowing that Audrey was going to be with me.

  The S&Ps opened at 145.00, up 1.15 from the closing, which, of course, had been locked limit up at 143.85. “Shit, that’s not as bad as I thought,” I said. “When the knife closed up 4.10, I thought the S&Ps would open at least 145.50. This market might be coming my way. Maybe I should double up.” The old me might have done that, but from over my shoulder I heard Audrey screaming, “Get smaller, Buzzy, get smaller! We’ve already discussed this and you’re going to do what you have to do, so do it, NOW!!”

  I started buying in my shorts while Audrey stayed right on my shoulder telling me to “get smaller, get smaller.” Every contract I bought meant that much less I could lose. Within the first forty-five minutes, I was completely out of the position. I’d thought I’d lose a million, but by the time I was out, I was only down $800,000, and Zoellner was right, as soon as I was out, I started to feel better. I started to breathe again. I even got some color in my cheeks, all four of them.

  I fought like hell for the next four weeks and almost made it all back. By the end of November, I was only down $57,000 for the month. In December, I made $928,000 and ended the year up over $3 million in futures alone. So I’d made a mistake. Without Audrey there, I’d lost my balance. I’d gone crazy and sold into the up limit. That wasn’t important. What was important was that thanks to Audrey and Zoellner, I’d realized my mistake and got beyond it. I still had my touch, I still had the inside track on the S&Ps, my ability to make money, lots of money, was still unlimited.

  In December, just before the holidays, Audrey came home with her new coat. It was a beautiful Blackglama mink. She took it out of the box, put it on, and spun around like a model. “So, Buzzy. What do you think?”

  I went over and rubbed the back of my hand on the coat. No doubt about it, a Blackglama mink was just what we needed to keep my babies warm. “Very nice,” I said. “But then it ought to be nice. It cost us eight hundred thousand dollars.”

  The Losing Streak

  Every trader faces it. Only the winners know how to handle it. The dreaded losing streak rears its head every so often and attacks every great trader. It eats away at your judgment; it saps your confidence. Sometimes, it can take you so low that you think you’ll never get out. You’re sure that something has gone wrong, that you’ve lost your touch, that you’ll never be a winner again. When you’re in the middle of it, you think it’s never going to end, but mostly, your judgment and rhythm are off and what you have to do is stop and regain your composure.

  The best way to end a losing streak is to cut your losses and divorce your ego from the game. I learned this lesson many years ago at the crap tables in Vegas. The old cliché says “never send good money after bad,” and it’s true. You have to manage your resources and not lose too much of your stake. Many people when they’re losing increase their bets; they double up hoping to win it all back on one roll of the dice. That strategy can be devastating. The best way to stop a losing streak is to STOP! STOP THE LOSSES, STOP THE BLEEDING. Take time off and let your intellect take charge of your emotions; the market will be there when you return.

  But believe me, this simple advice is much easier to give than to take. In August 1996, I was in the worst losing streak of my career. What was driving me crazy was that I would see the trades, but I was so scared of losing, I wasn’t thinking about winning. This fear of losing was slowing down my reaction time, and while I was seeing everything, I was reacting later and later, which meant that I was taking more risks, not less. What I had to do was to step back and recharge my batteries, but I couldn’t stop. A guy called me and wanted to play some golf. I knew that I needed a break so I told him I’d play eighteen, but as I got up to leave, I couldn’t go out the door without a piece of the action. I couldn’t let the market go up without me. I bought ten lousy contracts and ended up losing twenty-five grand. It ruined my day and further sapped my confidence.

  You can never shift from reverse to first gear without first going through neutral. YOU MUST CHANGE THE DIRECTION OF BAD TRADING BY FIRST SHIFTING TO NEUTRAL. YOU MUST STOP. What happens is that as your fear of losing rises, your emotions start to short-circuit your intellect and you no longer have confidence in what you’re doing. Stopping lets your emotions calm down and lets you reestablish your momentum with your intellect. Remember, time is always your ally. Use it to relax, clear your head, and regain your energies.

  Once you’ve stopped, digested your losses, gone through a period of preparation, and feel comfortable with your work habits and methodology, you’re ready to start trading again. The best way to do that is to trade small and to concentrate on being profitable. DON’T START BY TRYING TO MAKE A KILLING.

  When I came back, I’d see a trade I liked and I’d do it small with a very tight stop, so if I was wrong, I’d get right out. All the time I kept telling myself, make little profits, make little profits, make little profits. Black ink, black ink, black ink. It’s all psychological. I felt sick and I wanted to make myself feel good again. I wanted to regain my confidence because CONFIDENCE IS ESSENTIAL TO A SUCCESSFUL TRADER. I had th
ree contracts the other day, which is a tiny position for me, but I ended up making $15,000 on them. Fifteen thousand dollars is real money, and I took that and built it into $40,000 the next day, and all of a sudden, I’m hot again, and I feel great.

  If for some reason this process doesn’t work initially, try it again by stopping longer and coming back trading even smaller. The most important thing is to protect your trading capital until you can regain your equilibrium and put all the shadows of the losing streak behind you. Losing streaks are an unfortunate part of the game, but if you are a good disciplined trader who can shift into neutral, the losing will end and black ink will start to flow again.

  8

  Champion Trader

  In Liar’s Poker, Michael Lewis said that traders liked to picture themselves as “big swinging dicks,” but up until 1983, it was impossible to tell who had the biggest dick. Back in the early eighties, traders were a small, private club, bordering on a cult. To the general public, we didn’t exist. Here we were punching it out day by day, trading more money in a couple of hours than most people traded in a lifetime, but nobody knew it. Occasionally a spectacular knockout, like the Hunt brothers or Billie Sol Estes, would get reported in the papers, but for the most part, we toiled away in relative obscurity. There was no way that we could get any public recognition unless we went broke big time, Texas style.

  Then in January 1983, I saw an ad in a financial periodical that said:

  UNITED STATES STOCK, OPTION & COMMODITY TRADING CHAMPIONSHIP

  Who are the nation’s top brokers, investment advisors, and private traders?

  COMPETE AGAINST THE NATION’s BEST.