by Jim Paul
The market opened and the spreads corrected about 10 points or so from the previous day’s huge rally. But that was $30,000 on my position! “No big deal,” I thought to myself. (Here’s another sign of having lost control. Here’s someone who has lost $30,000 and is saying, “Hmmm. That’s not so bad.” That’s a little nuts. Right? I’d just lost $30,000 in the first 5 minutes of Friday and I was feeling fine. “No problem. Too bad we can’t buy more of these.”)
The market came back during the day from down 10 to up 30 points, and did it right on the close. Bang! The spreads went our way again. Perfect! You couldn’t have written the script any better. Now we had Richard Dennis trapped over the weekend — or at least we thought we did. We actually had the chutzpah to think it was “good news” that wonder-trader Richard Dennis was on the other side of our position.
I made $60,000 that day. But the best part of it was that the market moved perfectly. In the last 5 minutes of trading the front month rallied sharply. I made $60,000, which meant another $150,000 or so was made by the group. The clients were calling again, “Ah, God, this is wonderful. You guys are so smart.” Naturally, I agreed with them.
On Saturday my family and I drove back to Chicago. When I returned the motor home, I just turned it in and paid them another $500 or $1,000, whatever it was, to take care of the phone, etc. I just didn’t want to bother with stuff. I was above all of that. My attitude was: “How much money does it take to make whatever I want to happen, happen? Fine. Do it. Here’s the money.”
Soybean Oil Gets Slippery
Monday morning I got in my brand new Porsche 911 convertible, put the top down and took the outer drive by Lake Michigan to downtown Chicago. I got into the office at about 7:30, a full two hours before the bean market opened. The sofa and chair in my office were covered in some special leather from West Germany. I think the set cost $7,000. The stereo was a $4,000 Bang and Olufsen. Everything in this office was about the most expensive you could make it. It was like The Robb Report: “How much can you spend on a desk? Fine. I’ll buy it.” I had a special desk that was on a copper pedestal coming out from the floor and the carpeting covered the base of it. On top of the pedestal was a giant 3′ × 6′ × 7″ piece of mahogany. The tabletop looked like it was suspended in mid-air. The credenza didn’t touch the floor either. It was a matching piece of wood bolted to the wall, also looking like it was suspended. When you walked into the office all you could see was carpet stretching out in front of you, a copper column rising up from the carpet and two pieces of wood levitating in mid-air, defying gravity. And that is just what I thought I was doing: defying gravity. I sat down at my fancy desk on the edge of my chair waiting for the market to open, ready to have another $50,000 day and thinking life couldn’t get any better than this. This time, I was right. It didn’t.
When the bean oil market opened that Monday morning, the spreads opened a little against us. By the close of trading, the bean oil spreads had given back most of the gains of the previous two days because of rain in the soybean belt over the weekend. I figured it was no big deal since the market had been up so much in recent weeks. “It’s just a correction in a continuing bull market,” I told myself. “Besides, it is too late in the growing season for rain to do the crop any good.”
On Wednesday, August 31st the oil spreads got smashed again, despite the fact that soybeans were 25 cents higher on rumors the Soviets were negotiating agreements to buy soybeans from the U.S. I was sure that with the beans up so much and the Soviet news, it was just a matter of time before the oil market caught up.
On Thursday the whole soybean complex (beans, meal and oil) collapsed on reports a Soviet jet fighter shot down a Korean Air Lines passenger plane.
“What does the KAL downing have to do with the bean market?” I asked.
“They think we’ll impose a grain embargo against the Soviets just like Carter did when the Russians invaded Afghanistan in 1980,” said Smith.
“That’s stupid. The Russians didn’t invade Korea. They accidentally shot down a passenger plane. There’s no comparison. The market’s wrong; we’re not going to have a grain embargo.”
I was right. Over the Labor Day weekend President Reagan condemned the Soviet assault but shunned tough retaliation. He refused to disrupt a new grain sales accord. Soybeans rallied sharply on the news, but the bull spreads in the oil market went down again. Once again, I chalked it up to the fact that the oil market had out-performed the beans in August; the beans were playing catch up and the oil market was resting before the next leg up. The spreads did stabilize for a couple of days as the market began to focus on the September 12th release of the Agriculture Department’s crop report. That report turned out to be wildly bullish: the damage to the crop was more severe than previously thought. Beans opened almost limit up the next day, but closed almost limit down. However, the bull spreads in oil closed higher on the day.
“Okay,” I said to myself, “this oil market is starting to turn back to the upside. This whole bull market was driven by the oil market and bean oil is starting to rally again. This market is turning.” But the next day the oil market collapsed again. Limit down in all contract months and more than limit down in the spot month, since there were no limits on the spot month.
On Friday the market stabilized and managed to erase about a third of the week’s losses. On. Monday, September 19th the bean market and the oil market roared to the upside. Over the weekend a winter storm system in Canada exploded and was drifting toward the Midwest U.S. “This is great,” I thought to myself, “just a few weeks after the worst drought since the 1930s wreaked havoc with most of the soybean crop, an early frost threatens to damage what remains. Okay, finally the market is going to turn. This frost is going to revive the bull market.” But it wasn’t to be. The market just slipped right back down again. I never saw the spread trade better than it had on that last Friday in August when I was at Broderick’s lake house. The decline was relentless, with only occasional spasms to the upside: up $10,000 one day, down $25,000 the next.
The market continued to grind lower, and I proceeded to lose about $20,000 to $25,000 a day, every day, for months. The clients I advised were sophisticated and experienced traders in their own right, and they had been bailing out of the market since early September. As far as I was concerned, this demonstrated their lack of courage to buy with pride and hold with conviction. Naturally, I didn’t get out. I was in for the long pull. This was going to be The Big Trade. The world was going to run out of bean oil, maybe even mayonnaise, and Smith and I were going to make $10 million.
Vertigo
For the next several weeks Smith and I kept telling each other, “It’s going to be all right. It’s gonna turn.” Every news story we heard about the market we made fit the “we are going to be okay” scenario. “Now we know why the market was down today. Now that we understand that, it’s going to go away. We’re going to be okay.” We rationalized everything. It was like living in Tortilla Flat with Danny and his friends, rationalizing everything. “Yeah, we just heard that some big commercial firm has just taken some deliveries of bean oil, so if he’s stopping them then it must be okay now.”
By the beginning of October, I was under water. Soybean prices had fallen to the lowest levels in two months — since the August 11th Agriculture Department’s crop report predicting a curtailed harvest. Bean oil was now at 29 cents, down from the September highs of 37 cents. I’d lost most of my money. As the position got increasingly worse, I began to get margin calls. I’d be on margin call for two or three days at a time but the firm’s attitude was: “We know you’re a big wheel. We know you’re on the Executive Committee at the CME, and we know you’re neat and you’ve got this fancy car. We know you’re good for the money.” I’d wait a few days to see if the market rallied. If it did, fine — I wouldn’t have to meet the margin call. If it didn’t, I’d spend the next couple of days trying to borrow money from my friends so I could meet the margin
call.
I gradually began to lose my outward cool. I was fighting with Pat and the kids; they had no idea what was happening. But it’s not uncommon for the spouses and families of traders not to know what’s going on with the trader’s market positions. I was skipping dinner so I wouldn’t have to face my family. I lost 15 pounds. I couldn’t sleep. I was going to bed every night knowing I had to get up the next day and go watch this thing again. It was horrible. It would be a Friday, and I’d say, “Okay, it’s Friday. I can’t lose any more on this for another couple of days because the market won’t be open.” Weekends were welcomed. It was exactly opposite of when I was making money on that trade. When I was making money, I couldn’t wait for the market to open. When I was losing money, I couldn’t wait for it to close. Time is very painful when you’re losing money. All I wanted was for the market to rally back to the August highs, and I’d get out.
We refused to accept the obvious: that we were going under. We were holding each other’s hands, and every day we went through this little drill of losing an average of $20,000 to $25,000 but telling ourselves that it was going to be all right. Naturally, it never was. It got to be excruciatingly painful. But I couldn’t get out of the market because as long as I had the position on, there was always the belief, the chance, the hope, that I could make back the money. If I got out of the market there wouldn’t be any chance anymore. “Tomorrow is the first day of the rest of my life. It’s going to turn — tomorrow.” It was always going to turn “tomorrow.” But it never did.
By the first week in November, I was under water big time: $200,000 or $300,000. Bean oil was at 25 cents. So from the high of August, I was down about $700,000 or $800,000. What was worse is that I’d borrowed money from my friends to the tune of about $400,000. I got another margin call in mid-November, but I didn’t want to borrow any more money from my friends. So I decided to ride out the storm again to see if the market would rally enough to take me off the margin call. On November 17th one of the senior managers from the brokerage firm came into my office and started liquidating my position. The firm finally, and mercifully, pulled the plug on me because I couldn’t do it myself.
They not only liquidated the account, but they also started seizing whatever assets I had. They took my membership and sold it, which forced me to resign from the Board of Governors and the Executive Committee since you can’t be on the Board if you’re not a member of the Exchange. Then they literally started to take the stuff out of the office: the furniture, the stereo and the levitating desk and credenza. I can remember sitting at my desk crying as they started to strip the office. It was the absolute lowest point in my life. I had gone from having everything on August 31st to nothing on November 17th. I couldn’t stand to watch them take all the stuff away, so I took the pictures of my family off the wall, put them in a box and walked out of the office. I vaguely remember wandering the halls of the Exchange for a while trying to figure out what I was going to do. I couldn’t borrow any more money from friends, and my only hope for making money had been the bean oil position. Now it was gone. Well, Pat and I had been through some tough times before, surely we’d make it through this one, too. “Oh my God! Pat! How was I going to tell Pat what had happened? How was I going to tell her that my fifteen year career and all of the money had evaporated in the last two-and-a-half months?” I headed for The River Club at the Exchange to sort things out over a Jack Daniels.
Several hours, and several drinks, later I weaved my way to the Porsche. I remember deciding the only way I could ever get out of this for my family was to kill myself. I had about a million dollars worth of life insurance, and the only way I could make it right for my wife and kids was to hit a bridge at 100 m.p.h. I remember thinking to myself, “Everybody knows I drink too much anyway, so it will look like an accident.” I thought the insurance company wouldn’t pay if it was suicide. I got on the Kennedy Expressway and started looking for a bridge. I had barely even gotten out of the city when I noticed blue lights flashing in my rear view mirror. I pulled over and waited for the cop to come to the window.
“License and registration, please. Any idea how fast you were going, Mr. Paul?”
“Uh, . . . 75? 85?”
“Try 18.”
I couldn’t believe it. I was so drunk and so dazed over what had happened that I hadn’t even gotten out of first gear. I didn’t get a speeding ticket. I got a non-speeding ticket; a ticket for careless driving. I was a road hazard because I was doing 18 m.p.h. on an expressway in a Porsche.
After recovering from the temporary bout of insanity of flirting with suicide, I spent the next three weeks in the house. I re-finished the living room floor and did a bunch of other little piddly things around the house. I had to act like I was doing something constructive, so I became Mr. Handyman. That was my “job.” I’d have the T.V. on the financial news channel like I was watching the market and staying abreast of things — even though I didn’t have two dimes to put together to do anything about it. I even kept my charts updated but it was all phony. I wasn’t doing anything; I was just acting like I was doing something.
Nadir
After about a month I went to see my old friend from the lumber pit, Stu Gimble. I had no job, no money and no prospect for either. For some reason Stu wasn’t discouraged at all. He thought it was the best thing that could have happened to me. “This is great. We’ll get you back on your feet again. All the great traders have gone bust at least once in their careers. You’re gonna be fine.” He leased and paid the rent on a seat in the Eurodollar pit for me while he tried to teach me to do what he did. A sudden realization was beginning to set in; I wasn’t a trader. I couldn’t do it. I wasn’t good enough. I literally couldn’t do what he did, even though I had the best teacher and conceptually understood what he was doing. I wasn’t quick enough. He had this fantastic thing for numbers that was unbelievable. But my brain didn’t work like his. So there I was in the Eurodollar pit, with no customer business, trying to be a trader and I couldn’t make a living.
In September 1984, my accountant figured out that I could re-file my previous three years’ tax returns, average all three years’ income and get a tax refund. Combining the losses of 1983 with the money I had made in ’82 and ’81, I got a check from Uncle Sam for about $100,000. That wasn’t much money relative to my dire financial situation, but it was a grub stake. The Eurodollar market was so slow and efficient that there just wasn’t much price movement. I was used to the lumber market which really moved a lot, and I thought that whatever I had learned in the lumber pit would apply better to S&Ps than Eurodollars. I bought an IOM (Index and Option Market) seat for $55,000. I was going to try to trade the S&P 500 futures index.
I tried that for 5 months, and I didn’t make any money doing that either. I wasn’t any good at it. Once again, this validated that I didn’t know how to trade. I tried to rationalize that away, i.e., I hadn’t traded in the pit for so long, and I was used to trading from a computer screen in an upstairs office. I sold the seat for $60,000, and that was the last $60,000 I had in the whole world. I hooked back up with Kirby Smith, who was at a small brokerage firm, and we sat in an office everyday acting like we were going to trade and make the money back. I played that game until October 1985 and slowly ate up the money. I was still paying for the car, the house and all the expenses of having a family. You can go through money pretty quickly with those kinds of bills and no money coming in at all.
If I didn’t get it together soon, I’d have to get a real job. I’d have to go back to work to survive and keep my family alive. I didn’t want to do it, since I had come to believe I was above all that. You gotta do what you gotta do. 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. It was time to be a smart man — humbled, but resolved to learn from my mistakes.
5
The Quest
How Do The Pros Make Mon
ey?
Not only did I lose all of my money because of the stupid way I handled the bean oil position, but I also discovered that I’d never really been a trader. Sure, I had made money in the markets but it turned out that I really didn’t know how or why I had made it. I couldn’t duplicate the profits when I had to make a living strictly by trading. The money I’d made over the years “trading” wasn’t because I was a good trader. I’d made money because of being a good salesman, being at the right place at the right time and knowing the right people, rather than because of some innate trading ability.
It was a painful realization to discover that I wasn’t a trader. I didn’t have the patience or mechanical skills to be a successful floor trader, nor the consistency to be a successful upstairs trader. If I was going to learn how to make money trading I was going to have to find out how others had done it. I went and read the books and articles about, and interviews with, successful market professionals. I studied the best investors and traders from Wall Street and La Salle Street: Peter Lynch, Bernard Baruch, Jim Rogers, Paul Tudor Jones, Richard Dennis and many more. After all, when you’re sick you want to consult the best doctors, and when you’re in trouble you want the advice of the best lawyers. So, I consulted what the successful pros had to say about making money in the markets. If I could figure out how they did it, I could still pull off getting rich again. And this time I would keep the money.