by Jim Paul
The first week in November, I was under water big time: $200,000 or $300,000. I didn’t even know how much it was. Bean oil had gone from 36 or 37 cents a pound down to 25 cents. So from the high in August, I was down $700,000 or $800,000. To make matters worse, I’d borrowed about $400,000 from my friends.
The firm finally, and mercifully, pulled the plug on me because I couldn’t. On November 17th one of the senior managers from the brokerage firm came into my office and proceeded to liquidate all my positions.
I went from having everything on August 26th to nothing on November 17th. However, I didn’t intend to give up on trading. I viewed it like blackjack in the caddy pen: I wasn’t going to quit playing, but I was going to quit losing.
──────── ◆ ────────
I didn’t lose that kind of money simply because of a faulty method of analysis. That may have played a role, but something else was going on to keep me in a losing position even to the point where I went into debt to hold onto it. That something was the psychological distortion accompanying a series of successes, drawing my ego into the market position and setting me up for the disastrous loss.
As mentioned in the Preface, these same distortions afflicted Henry Ford and contributed to his company’s downfall in the 1920s and 1930s. And these distortions continue to afflict businesses, managers and CEOs today. For example, in 1993, management guru Peter F. Drucker wrote in The Wall Street Journal that, “The past few years have seen the downfall of one once-dominant business after another: General Motors, Sears and IBM, to name just a few . . .” and that “IBM’s downfall was paradoxically caused by unique success.”1 Drucker has also said, “Success always obsoletes the behavior that achieved it.” While some of the factors contributing to these downfalls were a function of the particular strategies the firms employed (Drucker called them The Five Deadly Business Sins), there were other factors that were a function individual managers’ decision-making. This book explores the latter factors.
Personalizing successes sets people up for disastrous failure. They begin to treat the success as a personal reflection rather than the result of capitalizing on a good opportunity, being at the right place at the right time or even being just plain lucky. People begin to think their mere involvement in the undertaking guarantees success. Apparently, this is a common phenomenon. Listen to An Wang, founder of Wang Laboratories: “I find it somewhat surprising that so many talented people derail themselves one way or another during their lives . . . all too often a meteoric rise triggers a precipitous fall. People fail for the most part because they shoot themselves in the foot. If you go for a long time without shooting yourself in the foot, other people start calling you a genius.”2 Listen to Herb Kelleher, CEO of Southwest Airlines: “I think the easiest way to lose success is to become convinced that you are successful.”3 This “becoming convinced” is the process of personalizing achievements or successes. Learning to recognize and prevent that process is what this book is all about.
When I was a kid, my father told me there are two kinds of people in the world: smart people and wise people. Smart people learn from their mistakes and wise people learn from somebody else’s mistakes. Anyone reading this book has a wonderful opportunity to become wise, because I am now very, very smart. I learned a lot from the mistakes that led to a million and a half dollar loss in the market. But there is more to the story than the fantastic fall from the pinnacle of millionaire trader and member of the Executive Committee at the Chicago Mercantile Exchange. There is the almost fantasy-like ascent to the top that set the stage for the collapse.
1
From Hunger
I got my first job when I was nine years old. One of my classmates was a caddy at a local country club near Elsmere, Kentucky. One day he asked me if I wanted to be a caddy too, and I said, “Sure.” My parents thought it was a good idea since it would teach me the value of a dollar. I thought it was a great idea, since I would get to keep the dollars.
This was the beginning of my love affair with money. As a result of working at the country club, I learned just how important money really was. It enabled people to have the nicer things in life, most of which I hadn’t even known existed. My father was only making $4,000 or $5,000 a year as a surveyor back in the early 1950s, so we couldn’t afford the nicer things in life.
Summit Hills was not a very fancy country club, but it was a country club and the people there had a lot more money than the people near where I lived did. So, at the age of nine I became one of the only kids in my class at St. Henry’s who knew that “Oldsmobiles are better.” I used to caddy for Charlie Robkey. He didn’t play golf very well, but he made a lot of money and had a beautiful car. Charlie would show up in his new Cadillac Eldorado convertible with the top down and his good-looking blonde wife who had on a chiffon scarf sitting next to him. I would say to myself, “Self, I like what Charlie’s got, and I think I want to do what Charlie’s doing. I don’t want to drive a Chevrolet like my folks. I’d like to have an Eldorado like Charlie.” I didn’t even know what Charlie did for a living, and it didn’t matter. Charlie made a lot of money and had many of the nicer things in life.
Goose Nickels
As far as I could see, it wasn’t what you did for a living that was important in life; it was how much you got paid for doing it. This idea was driven home not only by the members of the country club like Charlie Robkey, but also by the other caddies. We all admired a guy by the name of Goose — Old Goose. He was about fourteen or fifteen, and that’s old to a nine-year-old. We had a big area called the caddy pen where all the caddies would sit around waiting to go out on a round. We used to pitch nickels against a wall, and Goose was very good at pitching nickels. He could get those nickels to stop up against the wall almost every time. So while I was toting these big golf bags around for four hours to make two dollars, Goose was up there in the caddy pen pitching nickels. At the end of the day, Goose had more money than I did. I worked harder than Goose, but Goose had more money. He had the respect and admiration of everybody in the caddy pen — not because he could pitch nickels better than everyone else, but because he had a lot of nickels. Making money became important to me; whether I made it by slow honest industry carrying golf bags, or by quick strokes pitching nickels. It wasn’t what you did; it was how much you made.
No Little League
This view of the importance of money was also reinforced by my parents. They not only wanted me to learn the value of a dollar, but they wanted me to have a job and start making that dollar. Some of my friends from school were trying out for the little league baseball team and, naturally, I wanted to try out, too. When we got to the field, the coach asked each of us what position we wanted to try out for. I said, “Shortstop.” I didn’t know what a shortstop was or did, but it was the only position I’d heard my friends talk about. Besides, I was short and thought the name sounded neat. That was a mistake; every ball hit to me either rolled between my legs, glanced off my glove or bounced off my head. But I could hit the ball. I hit many of the pitches over the outfielders’ heads. Then I hit one directly at the coach who was pitching. I made the team . . . playing left field.
At our first game I hit a grand slam home run to win the game 4 to 2. My expert fielding was responsible for the other team’s two runs, as well as for getting my uniform dirty. Well, the uniform was a problem because I hadn’t told my parents that I had gone out for tryouts and made the team. When I showed up at home that afternoon with a dirty baseball uniform for my mother to clean, I was told I had to quit. “Baseball isn’t practical; caddying is. You make money caddying, not playing baseball.” Thus ended my short-lived but illustrious baseball career, reinforcing my view that money was important.
So it was through my exposure to the country club and the caddy pen that I first learned about money and something about making it. I also learned that it was possible to make money playing blackjack, poker and gin. By the time I was ten, I wa
s playing nickel blackjack. Since money was important to me, I was very upset when I almost always lost at blackjack in the caddy pen. I was whining to Goose about it one day, and he told me that I was losing because he and the other guys were cheating. He showed me how he burned the first card on the deck, placing it face up on the bottom so that you couldn’t tell the difference between the top and the bottom of the deck. He would pick up the old hands and place them on bottom, but rotate the deck as he needed the known cards on the bottom. I didn’t stop playing blackjack, but I did stop losing.
After being exposed to this money-culture at the country club, I wanted to get involved in what the people who had the money were involved in. I wanted to know the right people. So I ingratiated myself with the right people, like Johnny Meyer. Johnny Meyer was the club champion. I became Johnny’s personal caddy, which is how I got out of Elsmere, Kentucky the first time in my life. I went to Big Springs Country Club with Johnny in his big Chrysler convertible. He took me to Louisville to be his caddy when he played in the Kentucky State Amateur Championships. We drove from Cincinnati down to Louisville, and at thirteen years old I just thought that was the neatest thing in the world. I was in this cool car with this neat guy who was a great golfer, and I was going to a country club in another city. He was taking me because I was such a good caddy. It was only a seventy mile trip, but for me that was a long way.
My involvement with the country club set changed my perspective on the world and society. If I hadn’t been involved, I never would have known about the nicer things in life. Where I grew up in Elsmere, if you weren’t exposed to this “other life,” you’d have never known it existed. It’s the old situation where Joe Lunch Box is the happiest guy in the world. Joe Lunch Box is the guy who graduates from high school and gets a job at the local factory. He goes to work, tightens the four nuts on the left side of a V-8 engine, eats his lunch, tightens the four nuts on the left side of another V-8 engine, goes home, watches TV and has a beer. He’s happy because he doesn’t know that Eldorados are neat, that chiffon scarves on the girl in the seat next to you are neat and that McGregor golf clubs with the gold faces are the best and Spaulding Executives are second class. You want McGregor clubs with the gold faces. If you weren’t exposed to this “other life,” you didn’t know it existed and you didn’t know you were missing it.
The country club exposed me to the better things in life, and I wanted the better things. Well, that was a problem because once I learned about this “other life” and that it was better, I also knew that I was missing it. I was at a disadvantage to most of my peers, because I wanted more than they even knew existed. I wanted to learn how to play golf. I wanted to be one of the guys caddies would come up to and say, “Good morning, Mr. Paul,” just like I had to say, “Good morning, Mr. Robkey.” I wanted to become one of these country club guys, not one of those Joe Lunch Box guys.
Basically, what I learned at the country club was: it’s not what you do for a living that’s important. What’s important is how much you get paid for doing it. I could work hard like Joe Lunch Box or I could work smart like Charlie Robkey.
While I believed it was true that what you got paid was more important that what you did, it was also true that certain high paying jobs required some higher education. Joe Lunch Box only went through high school, whereas the Charlie Robkeys and the Johnny Meyers of the world went to college. I realized that in order for me to make serious money, I was going to have to get some kind of education. In order to get a reasonable education, I was going to have to pay for it. I needed money to get an education. To make money I had to have some money, so I always had some kind of job since I was nine years old. I was one of the few guys in St. Henry’s High paying my way through school. It was a parochial school and I had to go because my parents were strict Catholics, and they said I had to go. But my folks didn’t have enough money to pay the tab, so I paid for tuition, books and clothes. This reinforced my sense of how important money was.
I caddied until I was about fifteen. During that time I also worked in the pro shop and gave golf lessons. After I stopped caddying, I ran a golf-driving range for a while. Next I worked in a restaurant busing tables, and then I worked in a service station My senior year of high school I worked fifty-five hours a week in the service station. I’d get out of school at 2 p.m. and work from 3–11 p.m. five days a week and then eight to ten hours a day on Saturday and Sunday. My folks were very lenient about curfew the whole time I was growing up. I could spend my money and do whatever I wanted because I was working so hard. They really let me do whatever I wanted as long as I didn’t get in trouble. My dad’s attitude was: “If you screw up and get in trouble boy, I’m gonna. . . .” My parents laid the ground rules and I followed them.
Once you know what the rules are, it’s easy; just follow the rules and win. Once I figured out what it took to get from point A to point B, I did the bare minimum of what it took to get the job done. I drove my teachers crazy because I did well at what I liked, and I did poorly at what I didn’t like. All you needed to pass was Cs, so most of the time I got Cs. I did just what it took to get by — unless I was interested. If I liked the course, I’d get an A. Every report card I ever received had the same comment: “Does not work to potential.” I really drove my teachers crazy. And to top it off, I was elected president of the student council. I was not the type of person the teachers thought should be president. They wanted one of their pet student types who didn’t drink, drive fast or otherwise screw around.
I had a lot of freedom since I had my own job, my own money and my own car. I bought a ’53 Mercury on my sixteenth birthday with my own money: $700 cash. Man, was it neat! A year later I sold it and bought a ’56 Chevy, which was even neater. It wasn’t an Eldorado, but it was neat. At seventeen years old in Elsmere, Kentucky, one of the biggest things in your life was your car — and did I ever have a car. I had the ’56 Chevy lowered and shaved. I don’t know if anybody will remember what shaved is, but that’s when you take the emblems, the trim and the hood ornament off the car, fill the holes with lead, and then repaint it. Then you lower it. I put a big V-8 engine in it and a Hurst speed shift in the floor. This ‘56 Chevy was hot! It was dark metallic blue with rolled and pleated leather seats and special carpet on the floor. So by the time I was seventeen, I thought I was well on my way to becoming “Mr. Paul” at the country club. I was working and making money, and I had a cool car with a pretty girlfriend in the seat next to me. Look out Mr. Robkey, here I come!
2
To the Real World
I sold the ’56 Chevy to pay for college. Neither of my parents had been to college so it was sort of a big deal to them that I was going. I used the money from the car and my savings account to pay my way through college. The whole time I had been working, my parents had forced me to put 10% of whatever I made in a savings account which they controlled.
I was accepted to the University of Kentucky in 1961. At the time, state law mandated that if you graduated from a Kentucky accredited high school, you would be accepted to UK. The hard part was staying in once you got there. Since they didn’t have room for every Kentucky high school graduate, they tried to flunk out as many students as possible in the first two semesters. The flunk out course was freshman English. Early in my first semester someone explained that this was “the game” and I made sure they didn’t flunk me out of school. I couldn’t afford to fail, because the only way I was going to get into a country club as “Mr. Paul” was to graduate from college. So I studied my tail off and made a B in freshman English. I finished the semester with a 2.6 grade-point-average. All you needed to stay was a 2.0, and I made sure I stayed. Having survived that first crucial semester, I turned my attention to social life.
Frat Life
Boy, was I in for a surprise when I tried to make it on the social scene. Everybody around me had more money than I did. They also all had Bass Weejuns. I didn’t even know what a Bass Weejun was — it’s a style of
shoe. Everybody in Lexington wore Bass Weejuns. I had no money, no good clothes and no Bass Weejuns. I didn’t even have a suit. I bought my first suit when I was a senior in college, and my buddy Tommy Kron had to lend me the money to buy that. My folks were sending me $10 a week out of my “10%-of-everything-bank-account,” and that was my spending money. When I left Elsmere, I was a pretty big wheel; I had a neat car, I was dating the head cheerleader, I was President of the student council and so on. I had some status as a hometown boy, but when I got down to Kentucky as a freshman, I was from hunger again.
I was just another freshman in Kincaid Hall; a nobody. Socially, there is nothing more pitiful than a freshman boy in college. You are totally worthless. The freshman girls are all looking at the sophomore and junior guys, so the freshman boys just hang around with each other drinking beer and telling stories about how good it used to be in high school.
After six months of this, I decided that if I were in a fraternity things would pick up. So I went out for fraternity rush, which for me was a little bold since I had no good clothes, no upper-class friends and no money. My roommate was a guy named Jim Hersha. His background was similar to mine and, since misery loves company, we went through rush together. The first rush party we went to was at the Sigma Nu house. These people were nuts. They were the Animal House chapter. I swear to God, everything in that movie could have happened at Sigma Nu. When I was a junior, the alumni built them a huge beautiful new fraternity house. To get into the house when they had their big house warming party, you had to throw a brick through one of the windows. Hersha and I decided that the Sigma Nus were a little too crazy, even for us.