Compulsion and Imagination 250

When Wishes Become Claims 251

The Tyranny of the Shoulds 252

Real Pride/False Pride 256

17 Finding Your Freedom 259

Notes 263

Glossary of Terms 271

Bibliography 281

Preface

Books on the financial markets ... I must have 1200 of them in my personal library alone. There are books about securities analysis, options strategies, futures strategies, technical analysis, and so forth. Most of these books have good ideas in them, and about 2% of them are truly superior. But most of them share a common problem: they try to sell you an approach that relies on one basic method to "beat the market," one that in many cases hasnt even been fully tested in the real world. Other books conta in material so specific that you need a lot of previous knowledge and often years of experience before you can understand and use them.

Newcomers and established market professionals alike waste countless hours of valuable time learning about the markets through trial and error and by reinventing the wheel. Ive looked for a book that could eliminate this tremendous waste, one that ties together all the basic ideas required to understand the markets and make money with the knowledge. I couldnt find it, so I decided to write one. In addition, I decided to divulge some proprietary observations and discoveries that helped me achieve an average annual nominal rate of return of 70.71 %c during a 10-year period without a losing year, as shown in Table P.l.

During my career on Wall Street, I have developed a unique approach that integrates knowledge of odds, the markets and their instruments, technical analysis, statistical prob ability, economics, politics, and human psychology. Most market players rely on one, two, or three of these areas, but I combine all of them, assessing risVreward from every possible dimension to keep the odds in my favor. This may sound complex and cumbersome, but its really not. Reducing all these elements to fundamentals that can be applied in a direct, straightforward manner makes the complex relatively simple and manageable. This book is an exposition of those fundamental ideas and is designed for ma rket players who, like myself, rely on books as their main source of information.

The first books I ever read were about baseball players. 1 really loved baseball as a kid and dreamed about being a top professional. So I read about proven athletes -Hall of Famers such as Cobb. I emulated them, copying their batting and fielding styles, and practiced continually until one day I realized I was no longer emulating, but playing my own game. I have followed this pattern of learning throughout my life: choosing a goal, observing and reading the teaching, of

Table P.l Victor Sperandeos Annualized Rate of Return Nominal Annualized Year Rate of Return" S&P500h

10-year nominal annual rate of return for V. H. Sperandeo 70.71 % (does not include interest on cash balances). 10-year nominal annual rate of return for S&P 50011.5% (including dividends).

skilled professionals, and learning through practice and observation until eventu ally I developed my own unique style of achievement.

One thing, however, has changed. As a child, part of my motivation was the desire to be a hero -to be another Cobb, to win a gold medal at the Olympics when I was in gymnastics, and so on. But at some point, I recognized that there comes a time when you have to let the quest for glory go.

There is a pervasive idea, especially in the United States, that if you are not number one in your field, then you are lacking something. But only one person can be number one, and I think that people who make being number one their primary goal are asking for a life of frustration, even if they do reach the top. Like the gunslingers in the Wild West, once youre recognized as the best you become a target to be shot down, and when that eventually happens, what are ou left with? Glory is nice while it lasts (if it ever comes at all), but it usually never lasts very long. For example, in watching the U.S. Open recently, one of the commentators quoted Steffi Graf as saying she was happy with only I out of every 30 games she played. This phenomenal tennis player, who has won 97% (!) of her professional matches in the last three years, is generally unhappy with her game. It is unfortunate that someone so great at what she does is probably basically unhappy.

The essence of success and happiness results from actualizing your potential, which requires a constant process of learning and growing, as well as the recognition that making mistakes is an inevitable, even essential, part of life. Realizing this, I write this book for those who seek from their participation in the financial markets the greatest reward life has to offer: self-satisfaction.

Heroes like Cobb, Babe Ruth, Willie Mays, Mickey Mantle, and their modem counterparts provide role models for child athletes and give sports a glorious image to kids and adults alike. But every pro ballplayer who makes a career out of the game is exceptional. Out of an enormous pool of talent, the unsung career pro emerges and proves himself through consistent performance year in and year out. Within this group are men of solid character, and perhaps our children could learn as much or more from them than from the stars, especially since so many of the modem day, top -performing athletes lose control of their lives and abiliti es by succumbing to drags or other problems that are often the offspring of fame and glory.

Im a market professional-a major league player, if you will-and I am very good at what I do. But if there were a Traders Hall of Fame, I probably wouldnt be indu cted. There are plenty of market players who have made more money than I in any given time period. There are guys who have won trading competitions and guys who have taken huge gambles and won. There are also those who have seen their glory days come and go. Ive never entered a trading competition, and I never gamble more than I can afford to lose. I think my unique strength is in my consistency. Like the baseball players who never achieve heights of glory, I pride myself in my ability to successfully stay in the game and keep after it, constantly striving to improve my skills or adapt them to changing conditions.

Whenever I pick out a book to leam about any subject, I always choose those written by or about men with proven records of success or achievement. So if I claim to be consistent, then Id better prove it.

When I started my career on Wall Street as a quote boy in 1966,1 had one major goal: to make money consistently month after month, year after year. From the start of my independent trading caree r in 1971 until I stopped regular intraday trading in January 1988,1 never had a losing year on my own account. For the period starting July 1,1972, and ending December 31,1987,1 generated more than $10,000,000 in gross trading income for my own and other accounts where I had sole discretionary authority. In these accounts, I always had at least 50% of the responsibility for losses.

Shown in Table P.2 is an indication of my performance from 1972 to 1987. These figures show my track record while trading on my own businesss account from 1972 through 1987, and for others as indicated by the notes. What is not shown is that while at Interstate Securities, I was also trading for myself and others through my own company, Hugo Securities. My production at Interstate was matched by my own at Hugo and in one other private account, so the total income generated from 1978 to 1987 is almost triple what is shown in Table P.2 To avoid confusion, I didnt include the production numbers from Hugo during that period because they include not only my performance, but the performance of other traders that I hired. But even if you ignore that income, I think the numbers in the table are more than just a respectable batting average; they are definitely good enough to indica te that I