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1966 to 1977 was like an apprenticeship (a very long apprenticeship), training me to take advantage of a golden opportunity to work as an independent contractor via Interstate Securities from March 1978 through September 1986. During that period, trading stocks, bonds, futures (both commodity and index), and options of all kinds, I earned for myself an average of approximately $600,000 per year, trading on my own and on a 50-50 profioss basis with Interstate and a few selected financial partners. I felt I had found the freedom I always wanted.


Freedom to me means a lot more than political liberty; it means the ability to make a living doing what I want and like to do, which requires maintaining a financial independence so secure that n othing short of outright robbery or my own foolishness can take it away. Even as a teenager, the thought of relying on a paper route or a job as a bag boy at the comer grocery was tantamount to slavery in my mind-too much of the control was out of my hand s. Instead, I made money doing something I had a lot more control over: gambling.

I didnt really gamble; I speculated. Gambling is taking a risk when the odds are against you, like playing the lottery or pumping silver dollars into a slot machine. Speculating is taking a risk when the odds are in your favor. The art of speculation consists of being able to accurately decipher and play the odds, knowing how to place your bets so that you will be able to play in the next hand even if you lose, and having the emotional discipline to execute according to your knowledge, not your whims.

"Gambling" was never very risky for me. When I started playing poker, I read every book I could find on the game and leamed that winning was a matter of managing odds; that if you play out your hand only when the odds are in your favor and fold when they are not, you will win more than you lose over time. So I memorized the odds of every card combination possible and played each hand accordingly. I didnt know it at the time, but I was leaming what was to become the heart of my approach to risk management.

I read one particular book, by a man named John Scame, 1 that indirectly changed my life. He talked a lot about cheating, and how it was done. I realized that if I was going to master poker, then I had to leam how to recognize a cheat. In my search for this new knowledge, I discovered Lou Tannens Magic Shop, a specialty store for illusionists and card magicians (and cheats). There, I met a man who dramatically influenced my life, Harry Lorayne.

Harry is one of the foremost experts on card magic and is probably best known for his many books on memorization techniques. As a teenager, I really looked up to him, and I still do. Everything he accomplished he did on his own through sheer force of will, energy, intelligence, practice, and innovation. He is a totally self-made man, and, as a teenager, I emulated him in many ways. Harry was both a role model and friend to me, and I spent most of my free Saturdays at Lou Tannens watching him and other card magicians performing their art.

I leamed not only Harrys card-handling techniques, but more importantly, his memorization techniques, which I still use today. To leam the card handling, I carried a deck of cards with me everywhere. When I went to the movies with my girlfriend, I practiced one handed shuffles and cuts in my left hand, while my right hand roamed about as a 16-yearold boys hands are apt to do with girls in movie theaters. I made a good living from ages 16 to 20 playing poker and performing card magic for paying audiences.

In the latter part of 1965. however, I realized that smoky card games and op erating on the edge of the law didnt appeal to me in terms of a lifelong career. So I made a complete survey of the New York Times employment section and found that biologists, physicists, and securities traders made the most money-525.000 per year! Since I knew more about odds than analyzing cells or atoms. I went to work for Pershing & Co. as a quote boy, with my sights set on achieving my concept of freedom as a trader on Wall Street.


I approached my career by observing successful men in the field and reading everything I could find on the financial markets. At Pershing. I observed Milton Leeds, who appeared godlike to me as he sat on the platform overlooking the trading room in his tailored suits and immaculate, white, custom -made shirts. Over a microphone he would yell out "99!" which meant that a trade for the firm was forthcoming and would take priority over everything else. The clerks would look up at him in an electric silence until he would call out something like "Buy 3000 Telephone at the market!"

Leeds was known as a "tape reader." but what he generally did was trade on news. He would sit and watch the Dow Jones and Reuters tapes for news, and the moment any significant news broke he would make a decision and place an order. In seconds, his floor brokers were executing his order. His quickness of mind in judging the impact of news on the market plus the physical setup of his organization gave him a jump on the market, and thats how he made so much money. He was a very shrewd man, and his trading record was excellent, especially in its consistency. Although I never emulated his particular methods, his very image became a symbol of success for me. I thought that I wanted nothing more than to become a successful tape reader.

In those days, tape reading was the way most well-known traders and speculators made their money, and I intended some day to join their ranks. I read the few books that were out on the subject, and practiced watching the tape and memorizing the latest print on many different stocks. Through consistent practice, I began to get a sense of the market.

For those of you who dont know about tape reading, it was the infant that grew into modem technical analysis. As technical analysis does today, tape reading relied on pattem recognition. The biggest difference was that the pattem recognition was as much or more subconscious than conscious. Like being "on" in sports, if you stopped to ask yourself what you were doing right, you could lose your concentration. All kinds of factors came into play, too many for your mind to be explicitly aware of. You watched a group of 10 to 40 stocks, constantly memorizing prices, previous high and low points, and volume levels. Simultaneously, you were subconsciously aware of the speed and rhythm of the tape movement, the sound of the ticker, the frequency of new prints on a specific stock, the rate of change of prices of the market averages and on any given stock, and repeating price and volume pattems. The subconscious conclusions drawn from all this contributed to what was often called an "intuitive feel" for the market.

Advances in knowledge, particularly in computer and communications tech nology, have made tape reading a dead art. Today, all the formerly "intuitive" knowledge is available at the fingertips of anyone who can afford to pay for any of the fine computerized information systems available. You can track the movement of any stock, stock group, index, or futures market with charts that are updated automatically tick by tick. With some software, you can draw trendlines, alarm -buy and -sell points, and much more. I believe tape reading required a special kind of aptitude that just isnt practical or necessary anymore, except maybe on the floor of the exchanges. Cons equently, trading is open to a wider field of competition.

There is at least one thing, however, that all good tape readers knew that still holds tme today. When you make a trading decision, you should feel absolutely confident that you are right, but you must also recognize that the market can prove you wrong. In other words, you are absolutely right until you are proven wrong. Consequently, you have to trade by mles and principles that take precedence over your feelings or wishes. Whenever you buy or se any market, you have to ask yourself, "At what point will the market prove that Im wrong?" Once you establish that point, nothing should stop you from closing out when the market hits it. This is the basis for the mle: cut your losses short. Violating this mle is the single biggest reason that people lose large sums of money in the financial markets. It is a curiosity of human nature that no matter how many books talk about this, saying the same thing in different ways, people still keep making the same mistake. It is my investigation of this problem, and my pursuit of an explanation that led to my interest in the emotional and psychological part of trading discussed in the second part of this book.

Back to ancient history. Along with working at Pershing. I enrolled in night school at Queens College to study economics and finance. In addition, I began to read The Wall Street Joumal and whatever books I could find on the markets. After six months making $65 a week at Pershing. I did some disastrous time on a statistics desk at Standard & Poors. The pay was better. $90 per week, but I simply couldnt perform well in the hushed, library-like atmosphere, cmnching and transferring numbers from one column to the next for hours on end. I used to be grateful when somebody sneezed;

it gave me the opportunity to say "Bless youand break the oppressive silence. I made too many mistakes, and I got fired. It was my first failure in a job, and I was too devastated to have the sense to be thankful to the guy who gently encouraged me to pursue my trading career, but to take a different path within it.

Fortunately, my courses in accounting at college helped me to land a position maintaining the books, accounts, and records in the private tax department for 12 of the 32 partners at Lehman Brothers in late 1966. Lehman Brothers, a pioneering firm in investment banking, made a fortune on such deals as buying huge quantities of Litton Industries at four cents a share and holding it while it appreciated to $120 a share. Working at Lehman Brothers, I got an insiders look at the world of investment banking and a first-hand view of the stock and options portfolios of one of the worlds largest market participants. I gained an understanding of how options worked and became somew hat of an expert in options tax accounting.

I leamed a huge lesson at Lehman Brothers that Ill never forget. In keeping the books, I knew how much money these guys made. One day, in going through the paperwork, I saw that Lehman was building up a huge position in Superior Electric for its trust funds. In my youthful naivete, I figured that the firm must know what it was doing, so I called Harry Lorayne and told him about it. On my say -so, Harry took a large position of his own in the stock, going long at $44 per share. Over the next few months, I watched in dismay as the stock price plunged to $30. Harry closed his position, losing $40,000 on the trade. I felt worse about it than any personal loss I had ever suffered. It was the last time I ever recommended a stock to a friend but, unfortunately, not the last time I would be suckered into taking a position because people who "knew what they were doing" were involved. But I did leam a lesson: dont do your friends a favor by offering them unsolicited advice on any market position. Its one thing to manage someones money, even a friends, on a professional basis; if you lose, its just part of the professional agreement. Its another thing to offer market advice when you think youre doing people a favor-you usually hurt them more than you help them.

Anyway, while I continued my work at Lehman, I kept studying, including memorizing the symbols of all 1458 New York Stock Exchange-listed stocks using Harrys memorization techniques. In 1968 1 demonstrated this skill during a job interview to Ricky Bergman, a partner at Filer Schmidt & Co. Impressed. Ricky hired me, and I began my trading career in eamest.


Relative to today, options were in their infancy in 1968. They were traded overthe -counter only and were tailotmade. Let me explain what I mean. A stock option is a contract giving the holder the right to buy (a call) or sell (a put) a defined amount of a specific stock, at a stated price (the strike price), within a specified time period. In 1968 the standard number of shares per contract was 100 (as it is today); the strike price was virtually always the current market price of the stock: and the most popular time period was 6 months and 10 days (because you had to hold an investment for 6 months and I day for it to be declared a longterm capital gain for tax purposes). The biggest difference between then and now, however, was that the price (the premium) of options varied from moment to moment and dealer to dealer.

When Joe Optionsbuyer called Typical Options Company for the price of an OXY (Occidental Petroleum) 6 and 10 call, there was no guarantee that he could buy the contract at the quoted price. Further, he may have called another dealer or two and found a 20 to 30% price differe nee either way! The dealer would quote the buyer a "workout" price of, say, $225 per contract, and then try to find a seller bidding $150 to $175. Once found, he would tum the contract over to his buyer and "make the middle." If he couldnt find a seller at a reasonable price, then Joe was out of luck and received a "nothing done."

From 1968 to 19701 horse-traded options first at Filer Schmidt, eaming a flat rate per contract ($6.25), and then at U.S. Options for a percentage of "the middle." While at Fi ler, I also managed my first hedge fund for a man named Starret Stephens, whom I had been introduced to at Lehman Brothers. He had a $1 million portfolio that I suggested he hedge on the short side with puts instead of shorting stocks, and he allocated $50,000 to me for that purpose. This was a relatively new practice at the time. Puts used this

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