Pit Bull

by Martin Schwartz

  OUTLINE OF NEXT CONTEST: For brokers, investment advisors, and the public. Contestants specify an account, begin trading for contest purposes as of Feb. 1, and submit copies of profit/loss statements if they do well. Leaders are published monthly, and are judged on the basis of percentage increase in market value from Feb. 1. Minimum starting balances are $5,000 for the stock, stock and option, and commodity divisions and $1,000 for the option division. Managed accounts may be entered.

  ENTER THE NEXT CONTEST. Call Financial Traders Association.

  (213) 827-2503

  Right away I knew that this contest was for me. Thanks to my trusty Telerate, I was sure that nobody was smacking the S&Ps like I was, and this contest would give me a way to prove it. Plus, I liked competition. I needed competition to get my juices flowing. I was ready to show the world that I was the biggest swinging dick.

  I called the number. “Financial Traders Association, Norm Zadeh speaking.” I’d never heard of Norm Zadeh or the Financial Traders Association. Nobody on the Street had. But did I care? “Norm,” I said, “whoever you are, sign me up. I’m the best trader in the country and I’m going to kick everybody else’s ass.”

  As it turned out, except for the fact that he was as bald as a billiard ball, Norm Zadeh was the Don King of trading. Like King, Zadeh was a gifted self-promoter with a colorful background. Rated the “fourth most knowledgeable gambler in the country” by Gambling Times, he’d been a professional handicapper, a professional poker player, and a professional sports gambler. His 1974 book Winning Poker Systems was considered a classic by many card sharks. Zadeh had Vegas written all over him, but thanks to a short teaching stint at UCLA, he chose to bill himself as a mathematician with ties to academia.

  According to an article by John Liscio in the July 10, 1989, Barron’s, “The idea for a stock-picking contest came to Zadeh in the early eighties, while he was a visiting professor at UCLA. Upset that the financial faculty did little more than sniff at him in elevators, Zadeh set out to show up the pedants by proving that their cherished efficient market theory was all wet. He began teaching a course in practical trading, using real money in an active futures trading account and inviting the class to trade along. After netting a return of 140% on his original investment, and watching the enrollment for his course zoom from 10 students to 85, Zadeh was shown the door.” Like a true fight promoter, Zadeh divided his United States Trading and Investing Championships into four divisions: stocks, options, stocks and/or options, and the real heavyweight division, futures. I entered the futures and the stock and/or options divisions.

  For me, even before this contest, trading was a lot like a prizefight. I’d divide the day into fifteen rounds running from 9:00 A.M. when bonds started trading to 4:15 P.M. when the S&P futures pit closed. I patterned this approach after the Merc in Chicago, which divided its trading day into half-hour blocks, or “brackets,” and released many of its trading statistics at the end of each bracket. Because trading volumes often picked up just before the hour and the half hour when the numbers came out, anyone who traded futures on the Merc for any length of time got used to thinking in terms of these brackets.

  I was a boxer-counterpuncher. Timing was my key. I’d spot an opening, hit it, and jump back. In and out, in and out, bob and weave, a point here, a point there. I didn’t take wild swings, because I never wanted to do anything that would jeopardize my family’s security. I outpointed the market by trying to win every round, and if I could help it, I never put myself into a position where I could be knocked out. It was a safe, unspectacular approach that didn’t give me too many big victories. For two hundred days a year, I’d end up with reasonably small losses netted out with similar-sized gains. Lose $5,000 here, make $6,000 there, round after round, twenty, thirty, forty times a day. But I’d win the other fifty trading days by clear-cut unanimous decisions. Smack the bonds for $75,000, hit a stock for $100,000, nail a couple of options for $125,000, pound the S&Ps for $150,000. Over time it made me a big winner, to the tune of $5 million a year.

  The fact that the contest was open to all comers and the minimum investment was only $5,000 for futures, options, and stocks and/or options, and $1,000 for options, put me at an immediate disadvantage. My style didn’t really fit Zadeh’s contest. I was going to start with $500,000 and jab away, trying to build up points by making steady daily profits, but with a low minimum investment, only a four-month trading period, and an invitation to all comers, any amateur could throw in $5,000 and hope to land a lucky punch. Amateurs could take chances that I couldn’t afford. While I was trying to make a living and provide security for my family, some dentist from New Jersey who fancied himself a great investor could get a tip from a patient on a couple of live takeovers, throw in $5,000, and triple his money. If he got knocked out, no big deal. If I got knocked out, I was out of business. Sure, I could play a smaller account just for the contest and try for the knockout, but that would change my style and I wasn’t going to do that. That’s how I’d played the market before I met Audrey and came up with my plan. Going for the knockout had made me a loser for nine years. Now that I’d developed a methodology that fit my personality, I was going to stick with it whether I was trading $5,000 or $500,000.

  The entry fees for the contest ranged from $150 for the stock division to $195 for the other three divisions, and there were only seventy-four entrants in the first contest, so it was obvious that Zadeh wasn’t making much from the fees. He had to have another angle. When I asked him how he was going to prevent people from “bucketing” trades, he told me that in addition to submitting copies of their profit and loss statements each month, every contestant had to phone in trades each day and leave them on a tape recorder.

  Aha. This had to be his angle. What Zadeh probably was trying to do was to find the brightest traders in the country and then piggyback their positions. But did I care? There was no way that anybody, except maybe the boys in the pit on the Merc, could steal from me. Zadeh might have thought about it, but when he saw how fast I was in and out of the S&Ps and how often I traded, he waived the requirement that I call in my trades every day. I just had to send in my monthly statement with my P&L.

  For the first contest, I placed third in the futures division and third in the stock and/or options division. That just got me more fired up. Third out of seventy-four contestants wasn’t bad, but for me, it wasn’t good enough. I felt like I was back at Amherst when Dean Wilson told us that 50 percent of us were going to be in the bottom half of the class. Here I wasn’t going up against kids from Andover and Exeter who were better prepared than I was. When it came to trading, I was more prepared than anyone, and I was determined to prove it. I was going to be the undisputed heavyweight champion of the world. I immediately entered the next contest. It ran from August 1 to December 1, 1983. This time, there were 133 entrants. I placed sixth in the futures division with a 69.2 percent return (the winner was some amateur who had a 388.4 percent return, probably on the minimum $5,000 investment). But I won the Most Money Made for the Year Award, and as it turned out, I’d made more money than all the other contestants combined. Always the promoter, Zadeh bought ads in Barron’s, Futures magazine, Investor’s Daily, Stocks and Commodities magazine, and the Wall Street Letter to announce the winners and solicit contestants for the next contest. I liked seeing my name in print, but still, I wasn’t satisfied. I had to be the “Champion Trader.”

  Frankie Joe had been crowned the Champion Trader for the first year, 1983. Frankie Joe was a forty-two-year-old former order clerk on the floor of the New York Stock Exchange. He’d come in second in the futures division with a 181.3 percent return and first in the stocks and/or options division with a 70.6 percent return. I didn’t know how much he’d invested or how much he’d made, all I knew was that he had the bragging rights and I was going to get him. “Norm,” I said when I called Zadeh and told him to sign me up for the next contest starting on Febuary 1, 1984, “you tell Frankie Joe that I’m going to kick his O
riental ass.”

  Confidence is every part of trading. If you’re not convinced that you can win, you should never climb into the ring. But confidence quickly turns to ego, and egos, like tired fighters, need to be massaged, soothed, sponged off, and stroked. Zadeh, the hustler/handicapper/gambler/mathematician, had this figured out. Winning is a great balm for confidence, but only public recognition can stroke an ego.

  The U.S. Trading Championship was becoming a hot item on the Street. For the contest starting February 1, 1984, there were 185 contestants and on February 18, the New York Times featured the U.S. Trading Championships on the front page of the business section. The article was called “Investing for Fun, and Profit” and had pictures of Frankie Joe and me, the 1983 Champion Trader and Most Money Made winners, at our trading desks. Frankie was smiling like a happy Chinaman, and I was grimacing like a tortured Jew. But Zadeh was the real star. The article described him as a “mathematician in Marina del Rey, California” and “former college professor” who’d started the trading championships last year as a business that would make money from the fees.

  But did I care? There was a whole paragraph about me. “The person who made the most money in 1983 in trades reported to the United States Trading Championship—a whopping $1.4 million—was Martin Schwartz, whose futures account rose 175.3 percent. Mr. Schwartz, a 38-year-old former securities analyst who owns a seat on the American Stock Exchange, said, ‘I can tell you how I became a winner—I learned how to lose.’”

  There’s an old Italian proverb that says “revenge is a dish best served cold.” I was tempted to make a few hundred copies of the article and plaster them all over the Great Pyramid. I wanted to be sure that the Pharaohs saw it. I wanted them to read it and weep when they thought about all the money I could have been making them if only they hadn’t shot me in the back. But I didn’t have to, because on February 19, I got a call from Inside Skinny. Skinny was wired in to the Pyramid and knew everything that was going on there. “Motty. Here’s a laugh. The High Priest and the Prophet are wondering how they can get you to manage some money for them.”

  “Yeah, sure, right. Tell ’em to give me a call when the Red Sea opens.” Good old Norm Zadeh. This was the best ego stroke I’d had yet.

  The contests were becoming so popular that Zadeh started advertising the standings in the financial publications every month. This generated more interest and publicity, especially since Frankie Joe and I were battling for the championship. We were going toe to toe, slugging it out for almost three months. Each month after the ads came out, Frankie Joe and I would start swinging all the harder. Then in mid-May, Frankie Joe called me. We’d never talked before. “Marty,” he said. “I’ve had it. I’m throwing in the towel. I’m going on vacation.”

  Thinking that I’d won, I said to Audrey, “Let’s celebrate. If Frankie Joe’s going on a vacation, we might as well take off too.” When we got back, I found out that Frankie Joe had sucker punched me. He’d been trading the whole time and with one day to go, he was 0.1 percent ahead. 0.1 percent? It seemed unbelievable, but it was a promoter’s dream. I went bullshit. I called Zadeh. “This is war!” I said. Norm loved it. He immediately called the Wall Street Journal and let them know that the slugfest between Frankie Joe and me had gotten personal.

  On the last day, I came out of my corner swinging. I hammered the S&Ps nonstop until 4:15. When the bell rang, I’d beaten Frankie Joe by 3.4 percent. Over four months I’d parlayed my initial stake of $482,000 into $1.2 million for a total return of 254.9 percent. Frankie Joe had taken his $5,000, or whatever he was trading, and increased it a mere 251.5 percent. The June 7, 1984, Journal ended its article by saying, “Mr. Zadeh plans his next contest for August. Mr. Joe, a 42-year-old professional trader, says he may not compete. ‘I have the insides of an 86-year-old,’ he says. But Mr. Schwartz will defend his crown. ‘I want to beat everybody,’ he says.”

  And I did. I entered the next contest and beat 262 entrants by posting a 443.7 percent return in the futures. Frankie Joe didn’t enter that contest and died shortly thereafter of a heart attack. Trading is very stressful, especially when you know that everybody’s watching, and Frankie Joe wasn’t kidding when he said that he had the insides of an eighty-six-year-old. At one time or another, every trader has had the same feeling.

  As time went on, I realized that Zadeh was using the contests to do a lot more than just piggyback trades. Through the U.S. Trading Championships, he’d quickly established himself as the most visible expert on the best traders in the country. Having this reputation allowed Zadeh to do three things. He made fees by matching investors with money managers, he started his own fund and recruited hot young traders to manage the money, and he came out with a newsletter called Summary of Top Managers. But did I care? Helped in part by the reputation I’d developed, I started my own fund in 1989.

  I relinquished my championship belt when I started managing other people’s money. Managing OPM gave me all the stimulation I needed, and then some. Then in 1992, I was going through some reevaluation and soul-searching about life. I called Norm and told him that, like every great fighter, I was going to climb back into the ring, that I wanted to win back my title. Having me come out of retirement was good for the contest and good for me. John Liscio announced my return in Barron’s with a feature article that ended by saying, “Spending a week or so chatting with Marty and following his trades, you’re left with little doubt that the man who has been called the Bobby Fischer of the S&P pits is still the grand master. Lock him in a room with the boss trader of your choice with nothing more than their wits, enough phones, a couple of quote screens and an equal amount of cash, and at the end of the day, far more often than not, Schwartz is going to come out on top.”

  He was right. I came back and regained my world heavyweight crown in 1992 by winning the new $500,000-plus futures division of the U.S. Investing Championship. Still the consummate promoter, Norm was always creating divisions within divisions, because more winners meant more competition, more contestants, and more money. Then I retired for keeps. Until I decide to come out yet again. After all, Sugar Ray Leonard and George Foreman did okay.

  Well, maybe not. Ultimately, Zadeh quietly suspended the contests. According to a December 26, 1996, “Heard on the Street” article in the Wall Street Journal, “a series of inquiries by the Securities and Exchange Commission coincided with the contest’s suspension, and may have helped cause it.” Apparently, what attracted the SEC’s interest was that Norm was “referring investors to money managers without detailed knowledge of the investors’ financial picture,” and his claims that the results of the contests were “verified.” Once again, it sounded a lot like Don King. Through the contests, Norm made himself a major player in the world of trading. But given all the different hats he was wearing—contest organizer, investment adviser, money manager, newsletter publisher, and private investor—he left himself too open to scrutiny and criticism. Norm, who was described in the Wall Street Journal article as “a professor of applied mathematics with visiting posts at Stanford University and University of California at Los Angeles,” admitted that he might have had some problems with verifying the results of the contests, “but Mr. Zadeh insists that his multiple businesses didn’t interfere in any way with his objectivity.”

  But do I care? Financial publications were doing articles on me, I was basking in the public recognition, and in addition to stroking my ego, the contests gave me credibility with my family and friends and within the investment community. Norm Zadeh took me out of my dark, lonely office and thrust me into the limelight.

  In July 1989, we were waiting for our bags at La Guardia Airport after returning from a vacation in Aspen. I picked up a copy of Barron’s and as I was thumbing through it, I saw an article by John Liscio on Norm Zadeh’s trading contests. In the center of the page was a big picture of me, sitting in my office. I showed the picture to my kids, who were four and six, just old enough to start to wonder why I didn�
�t put on a coat and tie and go to a real job like the other kids’ dads, and I said to them, “Who’s that?” And they said, “Daddy! Daddy!”

  When they got a little older and the other kids started asking them what Daddy did for a living, they could say, “My daddy’s the Champion Trader!” That was all I cared about.

  Honor Thy Stop

  One of the great tools of trading is the stop, the point at which you divorce yourself from your emotions and ego and admit that you’re wrong. Most people have a tough time doing this, and instead of selling out a losing position, they’ll hang on hoping that the market will realize the error of its ways and behave as they believe it should. This attitude is usually self-destructive, because as Joe Granville used to say, “the market doesn’t know whether you’re long or short and it could care less.” You’re the only one who’s emotionally involved in your position. The market’s just reacting to supply and demand and if you’re cheering it one way, there’s always somebody else cheering just as hard that it will go the other way.

  Taking a loss is hard to do because it’s an admission that you’ve been wrong. But in the market, being wrong some of the time is part of the game. On each trade, you have to establish your “uncle point,” the point where you’ll get out of a losing position, and you have to have the mental discipline to pull the trigger at that point.

  I was out playing golf the other day with my buddy Double Bogey, and D.B. was bemoaning the fact that he was getting killed in Bay Networks. He just couldn’t understand where he’d gone wrong. He’d heard about the stock when it was in the thirties, he’d read all the reports while it climbed through the forties, and he’d bought it when it backed off to $43. When it really backed off to $35, he’d committed the cardinal sin, he doubled up. Then he’d sat and watched it sink into the teens. “What really pisses me off,” D.B. said, “was that it rallied a couple of times during the fall, and instead of bailing out, I just hung on.”