Pit Bull

by Martin Schwartz

  Goals meant commitments, and commitments meant obligations, and obligations meant mortgages, second mortgages, car payments, car insurance, life insurance, health insurance, homeowners’ insurance, and, in my case, air-conditioning bills. What scared me most was the memory of my father stuck in a series of dead-end jobs, sitting in a mortgaged house, looking at a constant stack of bills, worrying about money. Getting trapped in the middle-class jail and ending up like my father was my worst fear. I couldn’t let that happen to me. I mopped my brow with my sleeve. God, it was hot at the Bertellis’.

  Freedom, I had to have my freedom, but as the afternoon wore on, I began to think that maybe my freedom wasn’t so important. What had it done for me lately? I was a thirty-three-year-old securities analyst going nowhere. I had just flown back from Texas from a sales trip, pitching my stocks to institutional buyers. I’d started at a breakfast meeting in Houston, had four more appointments there, then rushed out to the airport to go to San Antonio for a dinner meeting, and finally staggered into my hotel room in Dallas after dodging thunderstorms through the Texas darkness until one o’clock in the morning. Then I’d tried unsuccessfully to get enough sleep to be halfway rested enough to do the same tap dance the next day. It was getting so bad that Audrey was having to push me out the front door of the apartment to go on these sales trips. As we left the Bertellis’, I was thinking that Susan and Rich were right, what I needed was a plan, a script for success.

  “Here’s the money for the toll,” Audrey said, shoving two quarters at me. We were sitting in line at the Fishkill toll booth waiting to cross the Hudson River to Newburgh. The pavement was shimmering. The air-conditioning was on full blast, but still I was drenched in clammy sweat. The eighteen-wheeler in front of us belched out a cloud of smoke as it inched ahead. The Corvair behind us beeped. What the hell was I doing here? I didn’t want to be in this line. I didn’t want to go to Newburgh. I had to turn my life around.

  “Hang on, Audrey!” I floored the Cordoba and yanked the wheel hard to the left. We spun across the Fishkill toll plaza straight into the eastbound lanes. Audrey shrieked, tires squealed, horns honked, fists shook, fingers flipped. What did I care? Finally, I was heading in the right direction.

  When we got home, I grabbed a pad of paper and a pencil and sat down at the kitchen table. “This is it, Audrey,” I said. “Pull up a chair and gimme some goals. It’s time for me to become a star.”

  Audrey was the only person who could give me goals. Audrey was the only person who understood me. Until Audrey, all my experiences with women had been brief and puzzling. I had no concept of a normal healthy relationship with a woman. In 1976, I’d decided that women were just too complicated, that it would be easier for me to go celibate. Then I met Audrey Polokoff. She was beautiful, self-assured, confident, mature. And she liked me. She told me that I was the smartest guy she’d ever met. And she meant it. I couldn’t believe it. In the summer of ’76, Audrey Polokoff was just what I needed.

  By the summer of ’77, Audrey was talking marriage. It was the next logical step in our relationship. I knew that Audrey was what I wanted, and what I needed. When I’d met her, I’d been constantly in debt and consistently losing money playing the market. A year later, I was out of debt and $5,000 in the black. But marriage? How could I get married? What would marriage do to my precious freedom?

  In August, Audrey began talking about engagement rings. I began developing a spastic colon. In September, she began considering wedding dates. I began eating Gerber’s baby food. In October, she issued the ultimatum. “Buzzy, my lease is up next March and I’m moving with or without you, so make up your mind.” She was packing to leave for her nephew Jared’s bar mitzvah in Syracuse. Her whole family was going to be there and they were expecting Audrey to show up wearing a big rock, compliments of Martin S. Schwartz. Without the rock, I’d failed to make the traveling team. I was left home to deal with my spastic colon.

  I went for a sigmoidoscopy with Dr. Raymond Hochman, my proctologist. “Wow! Take a look at this knot,” the doc said, swiveling the screen so that he could share this up close and personal view of my large intestine. “There’s your problem,” he said, tapping the screen with his pen. “That constriction’s shrunk the path through your colon to about the size of a dime. We’ll have to loosen that baby up, pronto.”

  As I gingerly pulled up my pants, I asked Dr. Hochman if I could use his phone to call my broker. I’d taken the $5,000 I’d managed to save, thanks to Audrey, and dumped it into Syntex January 78 calls. My broker told me that Syntex was skyrocketing and my $5,000 had jumped to $15,000. “Sell!” I shouted into the phone. It was time to make the cash register ring, time to straighten out my colon, time to buy Audrey her rock, and time for me to grow up. In March, when her lease ran out, Audrey Polokoff became Audrey Schwartz. Now, four months later, she was telling me how I was going to become a star.

  “Buzzy. You’re thirty-three years old and you’ve always wanted to work for yourself. So 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 you’ll have to go back to being a securities analyst. Become a trader, that’s your first goal. Go ahead, write it down.”

  I picked up the pencil. Audrey was right. I’d always known that I wanted to be a trader. Nothing fit my personality better, and there was nothing I enjoyed more. I was good at math, quick with figures, I loved gambling, and I loved the market. BECOME A TRADER, I wrote in big bold letters. It looked good.

  “There, that’s my first goal, Become a Trader. Now, how the hell do I do it?”

  “Buzzy. A plan, you have to have a plan. Remember what Rich and Susan said. Now that you’ve got a goal, you have to have a plan for achieving it.”

  I sat and thought. “Well, the first thing I have to do is develop a methodology for trading that fits my style.”

  “Write it down,” Audrey said.

  Under BECOME A TRADER I wrote 1. DEVELOP A METHODOLOGY FOR TRADING THAT FITS MY STYLE.

  “Okay,” Audrey said, “how?”

  “Where’s the latest issue of Barron’s?”

  We spent the next two hours talking about my plan. We clipped coupons for trial subscriptions to market letters and stock charting services. We calculated how much I would need for a grubstake, the core capital base I had to have before I could go out on my own. We decided on at least $100,000. I couldn’t see how I could do it on any less. 2. ACCUMULATE A GRUBSTAKE OF $100,000, I wrote.

  “How long will that take?” Audrey said. “Remember, you have to set a time frame for achieving your goals.”

  “One year.”

  “Buzzy. One year? How can you make $100,000 in a year? You’ve been playing the market for nine years and you’ve never made anything close to that. You have to be realistic.”

  “Hey. Remember, I’m the smartest guy you ever met. If I’m gonna be a trader, I gotta prove that I can make the money trading. Not investing, not borrowing, not writing market reports. Trading.” WITHIN ONE YEAR, I added.

  We kept talking. I needed a mentor. Every top trader had a mentor, someone older, someone wiser, someone who was willing to show them the ropes. Michael Marcus had Ed Seykota, Paul Tudor Jones had Eli Tullis. Zoellner. It had to be Zoellner. Zoellner was the best tape reader in the business.

  3. MAKE ZOELLNER MY MENTOR.

  We talked some more. To be a trader, I needed a seat on some exchange. With a seat, my cost of doing business would go down dramatically. Members of an exchange could trade without paying significant commissions. Furthermore, they got “triple M’s,” market-maker-margins, much more favorable than the public participants. When I bought an option for one hundred shares at $3 a share as an “upstairs trader” I had to put up the whole $300 in cash. Members only had to put up half of that, $150. This gave the members leverage, enabling them to make (or lose) money twice as fast. And the exchanges had great health insurance for their members.

  4. GET A SEAT ON SOME EXCHANGE.


  I yawned. It was getting late. “Let’s wrap this up. We’ve gotta go to work in the morning.”

  “Buzzy, speaking of work, how are you going to keep your job while you’re making $100,000 trading? We can’t live on just my salary.”

  “Don’t worry. Hutton doesn’t know it, but I’m going on sabbatical. I’ve been doing this crap for eight and a half years. I know the companies and the industry cold. Hutton’ll get their pound of flesh out of me, but what takes most guys a week, I can do in a day.”

  “If that’s part of the plan, write it down.”

  5. TAKE A SABBATICAL. I threw down the pencil. “Okay, that’s it. There’s my plan.”

  The next day I shut my office door, told my secretary to hold all calls, and started working on my methodology. Developing a methodology that fit my personality was the most important part of my plan. Without a methodology for trading, I had no edge. Up to this time, I’d always been a fundamentalist focusing on inflation rates, interest rates, growth rates, P/E ratios, yields, profit margins, market shares, government policies, things that would affect prices over the long haul. Now I was going to transform myself into a technical analyst, a market timer, a trader, someone who was looking for indicators that would signal moves in the market itself. That’s the basic difference between an investor and a trader. A trader looks at the market as one living, breathing organism instead of a collection of individual stocks.

  As “Adam Smith” said in The Money Game, “The market is like a beautiful woman—endlessly fascinating, endlessly complex, always changing, always mystifying.” That quote kept running through my mind. Before Audrey, I’d been a loser with women, so it was easy to understand why I’d been a loser in the market. But now that I had Audrey, I was going to figure out what made this other beautiful woman tick.

  I began reading everything I could get my hands on about the market: Richard Russell’s “Dow Theory Letter,” Barron’s, Business Week, S & P Trendline Charts, Mansfield Charting, CMI Charting. One of my favorites was “The Reaper,” a commodity letter written by a good old boy named R. E. MacMaster from Sedona, Arizona. This transformation to technical analysis came to me naturally. I was a synthesizer, taking all these different theories and picking and choosing and blending whatever fit my personality, all the time looking for some mathematical harmony that would unlock the market’s secrets for me.

  Of everything I read, Terry Laundry’s Magic T Theory made the most sense to me, so I picked up the phone and called Terry and told him how fascinated I was with his work. Terry was an eccentric genius living out on Nantucket Island. He was a fellow marine, a jughead, who’d graduated from MIT and was now using his considerable engineering skills to analyze the market. Terry believed that the market spent the same amount of time going up as it did going down. What it did prior to going up was a kind of prelude, a cash buildup phase, when it was preparing itself, reenergizing, getting ready to go back up.

  When you look at the letter T, there’s an equal distance on the left side and the right side of the T, hence, the Magic T Theory. From the moment I saw it, I knew the Magic T was the key to my new methodology. It went back to who I was as a person: bilateral symmetry, Darwinism, evolution, the natural order of things. I totally embraced it. I worked fourteen hours a day, seven days a week. On weekends I’d draw trend lines and formulate opinions for the next week. Every night I’d review my charts, recalculate my averages, figure my inflection points, set my entry and exit prices. With the Magic T, there was order in the universe, a high and low tide every twelve hours. The Magic T and I became as one. Data ebbed and flowed in the most primal way and I rose and fell with it instinctively, viscerally, like a mollusk in the sands of high finance. I had my methodology.

  There was never any question who’d be my mentor. I started calling Zoellner three and four times a day. When Edwards and Hanly finally went tapioca in 1975 from the aftereffects of the bear market of 1974, Zoellner retreated to Hackensack and set up a small hedge fund. I used to stop by and see him when I was in New Jersey calling on the hospital supply companies. After Audrey and I got married, we’d drive out to Jersey on the weekends and I’d play tennis with Zoellner while Audrey and his wife, Vickie, would visit.

  When Zoellner first started his fund, he ran it out of a two-room office in Hackensack. He’d sit in one room, Vickie in the other. A Dow Jones ticker tape machine, an old stand-up model with a glass bubble over the top, continually chattered away in one corner of his office. Above it on the wall staring down on Zoellner’s work was a huge Atlantic salmon. These two objects, the tape machine and the salmon, represented the two great loves of Zoellner’s life, playing the market and fishing. I’d sit next to him and watch as hour after hour he gently reeled in the tape through his hands, his fingertips permanently stained a light purple with ink.

  “Marty, you have to feel the tape,” he’d say. “It’ll tell you everything you need to know. It can rise on bad news and sink on good news. If you can read the tape, you know when it’s healthy, and when it’s sick.” Then he’d pause, the tape resting lightly in his empurpled fingers, yards of paper piled up around his feet. “Marty, hold still, we’re getting a bite. Look here. Polaroid’s up another three-eighths. It’s coming to the surface. They must be selling a lotta cameras for Christmas, that means they’ll have a good fourth quarter. Check your moving averages. It could be time to pick up some January calls.”

  By early 1979, I could see that my plan was beginning to work. I was slowly mastering the nuances of the Magic T, adding new pieces here, discarding some there, trying a little of this, and a little of that, synthesizing the Magic T with whatever fit my personality and my mathematical bent. Through this process, I derived a methodology that was uniquely my own and, matched with Zoellner’s mentoring, it was starting to pay real dividends. My confidence was rising. I was landing some nice fish.

  I was primarily trading options, mostly calls because I was bullish on the market, on a dozen or so companies that I’d been trading for the past two years. These were major companies like Syntex, IBM, Honeywell, Teledyne, Polaroid, and Xerox that, as a securities analyst, I knew had sound fundamentals. All of them were heavily traded and very liquid. Liquidity was crucial because I was scalping, jumping in and out of positions in a matter of hours, or even minutes. Plus, the options were much more volatile than the stocks, which meant that for the same amount of money, I had a much greater upside potential. I’d usually have three or four call positions working at any given time and most of my bets were in the $5,000 to $15,000 range, which was compatible with the size of my grubstake. Typically, I was looking to make between $1,000 and $3,000 on each play.

  After breaking even in ’76 and ’77, I was now consistently making money. Before, when I was trading on a rumor or a hunch and the unexpected happened, it was terra incognita, an unknown land, and I was out there all alone. But now, the nightly routine of doing my charts, reviewing and revising my trend lines, calculating my moving averages, figuring my inflection points, setting my entry and exit prices was giving me confidence. I was like a chess player moving men around on the board in his mind, seeing positions five, six, seven moves in advance. I wasn’t trading that much differently, but I was trading a lot smarter. The process of doing the work was giving me an inner resource, a place to reach back in my mind for something tucked away in the recesses of the gray matter. It was helping me make better decisions. When you’re trading real time, and things start popping, you’re challenged to make immediate decisions. You can’t stand still, there’s no time to think, it’s attack or retreat, increase the position or get out. Having a methodology gave me strength, because in my mind’s eye I could see that I’d been there before. It gave me the confidence to pull the trigger NOW.

  During the first quarter of 1979 my grubstake passed $50,000, half of what I needed. There was no question in my mind that I was going to make another $50,000 during the second quarter of ’79. It was time to start working on the ne
xt phase of my plan, GET A SEAT ON SOME EXCHANGE.

  In 1973, the Chicago Board Options Exchange had been founded to trade listed options. Its instant success prompted other exchanges like the Pacific, Philadelphia, and American that were always looking for ways to increase their volume to go after a piece of the business. As part of my plan, I’d considered moving to Chicago, but why move to Chicago when I could get a seat on the American Exchange and stay in the City.

  Bob Friedman, a well-known hospital supply analyst at Montgomery Securities, was an acquaintance of mine. We’d both made the Institutional Investor magazine’s “All America Research Team” in 1976 and we’d see each other at meetings. One day Friedman mentioned to me that he had a stepbrother named Danny Weiskopf who ran a specialist operation on the floor of the Amex. When I told Friedman that I was thinking of getting a seat, he offered to introduce me. Danny Wieskopf’s book traded Bally Entertainment, one of the hottest options on the floor, and when I went to see him, he was as busy as a mohel at a bris for quadruplets, so he pawned me off onto Hayes Noel.

  Hayes worked for Danny, was about my age, and had been on the floor since 1970. Like me, Hayes was deep into technical analysis and, like me, he was hoping to go out on his own. We quickly became friends. A couple of times a week, I’d tell Beverly Schneider, my secretary at Hutton, that I was going out for a long lunch and hustle over to the Exchange. I’d sign in at the visitors’ desk, get a badge, and they’d page, “Hayes Noel! Hayes Noel! You have a visitor at the front desk.” Hayes’d come down, and I’d slap on the badge and follow him around the floor. During these visits I was a marine reconnoitering a new objective, figuring out what I had to do to take it. I’d trail ten feet behind Hayes, watching him operate, checking out the terrain, memorizing who traded what and where, who was clerking for whom, where the phones were, where the bathrooms were.