Parti BUILDING YOUR KNOWLEDGE FROM THE GROUND UP

Introduction: The Secret of the Gamboni

The secret of the Gamboni is the secret of how to survive in the financial markets. Understand it... really understand it... and you are on your way to success as a trader, speculator, or investor. So. here it is:

Joe was a card player, a good one. He was so good, in fact, that he had to move from city to city and find games where he wasnt known in order play for high stakes. One afternoon, in a bar in the suburbs of Chicago, hes shooting the breeze with the bartender and asks, "Say. where can I find a good card game around here""

"What kind of stakes are you talking about" "Big." Joe says, "the biggest game you know about." "Well now. I hear theres a game out in the farm country. Its a bit of a drive, but these particular farmers play for big money. Let me make a call and see if its OK."

So the bartender makes the call, and then gives Joe directions to the game. That evening, after a long drive, Joe pulls up to this bam in the middle of nowhere. Tentative ly, he walks inside, tiptoeing around the fetid piles on the floor. At the back of the bam, he spots a partially open door, with light and smoke pouring through the opening. The familiar rush of anticipation and energy sweeps through him as he enters the room and introduces himself.

Farmers in overalls sit around the table, chewing cigars and puffing their pipes. In a quick glance. Joe estimates the current pot to be about $40,000 So he sits down. "Ante up, - says the farmer holding the deck of cards. And J oe begins to play.

About an hour later. Joe is holding his own. He is about even \N hen he draws three aces and two queens-a full house. With a large pot already on the table, the raises $15,000. The next two guys fold, but the leather-faced farmer across the table calls him and raises another $15,000, without so much as batting an eye. Joe, certain that the guy is bluffing, calls the bet and lays down his aceshigh full house. The farmer lays down junk: three clubs and two diamonds of mixed numbered cards. Joe, suppressing a smile, starts to rake in the pot.

"Wait just a dam minute," says the farmer, a stem and reprimanding tone in his voice. "Whattaya mean, wait a minute," says Joe, "you got nothin." "Take a look at the sign over your right shoulder," smiles the farmer. Joe looks:

THREE CLUBS AND TWO DIAMONDS CONSTITUTE A GAMBONI, THE TOP WINNING HAND IN THIS ESTABLISHMENT

Joe is really angry, but after all, rules are rules, so he continues to play with what is left of his holdings. About an hour later, he draws three clubs and two diamonds ... a Gamboni! He bets everything, and on the final round of betting with the same leather faced farmer he has to throw in his solid gold Rolex to make the call. The farmer tums over his cards a queen -high spade flush. Joe tums over his Gamboni and starts to rake in the pot.

"Hold it there, fella," says the farmer, his grin cutting deep lines in his cheeks.

"But I got a Gamboni!" cries an exasperated Joe. "Sure nough, but look at the sign over there," and he points over Joes left shoulder. Joe looks:

ONLY ONE GAMBONI WILL BE PERMITTED PER NIGHT IN THIS ESTABLISHMENT

Joe, broke but thankful for the invention of credit cards, leaves the bam with dung on his shoes, and the leather-faced fanner drives his tractor home feeling the weight of a solid gold Rolex on his wrist.

So the secret of the Gamboni is this: if you want to win. youve got to know the rules; and also, you cant win if youre not at the table.

Thats what this book is all about: defining the knowledge and rules necessary to stay at the table and make money consistently year after year. All the knowledge in the world is worthless without a plan to put it into practice and rules to give organization to the plan. In the financial world, this means acquiring the necessary knowledge, defining a business philosophy, instituting a method of money management, and sticking by well-defined rules to guide your day-to-day decisions. With the ideas set forth in this book, you can put your money to work, and if you are consistent in your execution, you will be profitable.

cases facilitate the orderly transfer of assets to their best use. I will make other critical distinctions between speculators and other market participants as the book progresses.

For most of my career, I have primarily been a speculator. Primarily, but not solely; I play all three trends, and every transaction I make involves knowledge of each of them, so I guess that makes me a speculative trader who also invests. For lack of a better term. Ill take the title "trader."

In my approach to the financial markets, there is an overlap of knowledge that spreads both ways from the middle; that is, the principles of speculation apply, with some refinements, to trading and investment as well. If you understand speculation, then it is relatively easy to shift to either trading or investing. Even more importantly, I firmly believe that the dramatic volatility in the markets that has developed over the last decade or so makes it foolish to buy and hold without understanding the importance of moving in and out of the markets or making portfolio adjustments with changes in the intermediate trend. That is why I decided to focus the subject matter on speculation.

This book presents the essentials of my knowledge to date about the art of speculation, which has many elements. I use the term art here in the general sense, not in the sense of the fine arts. But just as each painter has a unique form of expression on canvas, each speculator has a unique style of playing the markets. Still, every consistently successful market player must employ a similar set of tools: essential ideas and knowledge that guide decision making with unchanging validity. From my knowledge, including that gained by observing other speculators, I have abstracted those essentials for presentation to you.

My approach to speculation integrates knowledge of odds, the markets and their instruments, technical analysis, statistical probability, economics, politics, human psychology, and philosophy. It took me 10 years (1966 to 1976) to acquire and organize my knowledge into a systematic form. Prior to 1974 1 traded by common sense, technical methods, and prudent risk management. Since then. Ive learned to look at the big picture. If there is one fatal flaw in this business, it is allowing isolated information to drive trading or investing decisions-committing money without understanding all the risks. And there is only one way to understand all the risks: through systematic knowledge.

Before I present the knowledge behind my methods, let me sum up my career history, touching on the key elements that led me to formalize my knowledge about speculating. The 11 -year period from

From Gambler to Market Masten The Making of a Professional Speculator

People call me a trader, yet here I am writing a book primarily for speculators and investors-an apparent contradiction to those of you familiar with the distinction. So let me begin by doing what politicians never do: defining my terms. There are three price trends that are simultaneously active in any market: the short-term trend, which lasts from days to weeks; the intermediate-term trend, which lasts from weeks to months; and the long-term trend, which lasts from months to years. Within each market there are three basic types of participant: traders, speculators, and investors.

Traders focus their activity on the intraday and/or short-term trend. They buy and sell stocks, bonds, commodities, or whatever within a time frame varying from minutes to weeks. Speculators focus on the intermediate trend, taking market positions and holding them for a pe riod lasting from weeks to months. Investors, dealing mainly in the long term trend, hold their positions from months to years.

Before I go any further, I want to state for the record that I will not apologize for using the term speculator. When I use the term, I mean just what I said above: a market player who participates primarily in the intermediate trend. The term speculation has, in my opinion, gained an unearned negative connotation. People think of speculators as the people who drive prices up in sh ady stock transactions, real estate deals, and so forth. But in reality, all market speculators do is focus their attention on intermediate price movements, trying to profit by their buying and selling activity. Speculators provide crucial liquidity to the markets and in most