way provide leveraged "insurance" and free up capital for use on the long side.

The fund served its purpose, catching the July-August correction just prior to the bull market top in December 1968. Tragically, Starret Stephens died too young in 1969, just before the first major down leg of the 1969-70 bear market. The fund was dissolved because of his death. This was my first direct experience with managing money and hedging, and it gave me the opportunity to apply my untested ability to gauge the market by reading the tape. It also taught me the value of playing the short side-something that is still a specialty of mine.

Shortly after the fund was dissolved, when the 1969 bear market was fully underway, I quit Filer Schmidt & Co. and moved to U.S. Options in search of greater autonomy in my trading decisions. Afraid to commit to giving me a salary in the middle of a bear market, the management offered me a percentage of the spread on each piece of paper I filled (we called options contracts "paper"). I accepted, explicitly telling them that I was going to make $100,000 in my first year. I said this as a warning, because I knew that the vice-president of the company was only drawing about $25,000 a year in salary, and that the other options traders on salary were making about $12,000 to $15,000 per year.

Sure enough, six months later I had made $50,000 in commissions, and my boss pulled me aside one day and said, "Victor, youre doing such a good job we want to put you on salary."

"Oh yeah?" I said, "How much?"

"$20,000 per year," he replied, as if he was doing me some kind of favor. "But M ," I said, "Im on the track of making $100,000 this year, and Ive already made $50,000!"

"Oh yes, well, were setting up a point-allotted bonus system. For each piece of paper you write, you get a point. At the end of the year, well put 15% of the profits into a bonus pool to be divided up in proportion to points accrued by each trader."

"Mmmm," was about all I said, but obvious questions-such as what if the company didnt make a profit, and how were profits to be calculated-were buzzing around in my head. Needless to say, I started looking for greener pastures. Three weeks later, I was managing a stocVoptions portfolio on a 50% profit basis at Marsh Block. A good friend, who also quit U.S. Options eventually, later told me that my ex-boss had called him during the three-week interim and said, "It sure is a good thing we put Vic on salary; hes having a terrible month." Amazing. The man actually expected me to take an 80% cut in pay and work happily along! My desire for freedom was reinforced.

At Marsh Block, for the first time, I started actively trading stocks against options, relying on my accumulated knowledge of both tape reading and options strategies. Typically, I would buy a straddle of options and buy or sell the stock according to my reading of the market. A straddle is a pair of options: one put and one call with the same strike price and expiration date. Lets say the market price of XYZ was $25 per share, and I thought the price was going to $21. Paying wholesale rates, I would buy a 95-day straddle for about $400, looking to sell the stock short on a weak rally.

If the stock price hit $27,1 would sell 100 shares of stock short for the sell-off. If the market went against me to $30,1 would exercise the call at $25 and buy back the stock on the expiration date, taking a loss of $200 on the trade, while the put would expire w orthless. If it went to $21, as I thought it would, then I would buy 200 shares, thus making a $600 profit while still having a 200-share play on the upside (100 shares plus the call) if the stock price rallied above $25, while having a 100 -share hedge against the put with a guaranteed profit. Or I might simply buy back the 100 shares of stock, making $600, and essentially have a free straddle for use in another cycle. I always set it up so that the risVreward was at least 1:3 in my favor. Employing various strategies, I made substantial gains when I was right and lost only a little bit when I was wrong-the essence of my approach to money management today.

Unfortunately, the management at Marsh Block turned out to be playing the same tune as at U.S. Options, with just slightly different arrangement. When I received my monthly profioss statements, I found that my "expenses" were enormous. I had one phone with one line and got charged up to $500 a month! To make a long story short, I wanted greater control of my overhead.

After six months, I decided that the only thing to do was to go into business for myself. Evidently, a lot of other traders on the street were thinking the same way; nearly every good trader I knew and respected was ready to take a risk an d come to work with me. I found a partner to finance the operation, hired some of the best talent on Wall Street, and started Ragnar Options Corp. in mid 1971.

A TASTE Of INDEPENDENCE

At Ragnar, we took a radical new approach to the options business. To the best of my knowledge, we were the first brokedealer that offered guaranteed contract delivery at the quoted price without an exceptionally high premium. We called it "offering reasonable firm quotes." If we couldnt find an existing option contract on the market and then sell it at a premium to fill an order, we wrote it ourselves. Our competitors thought that we had tremendous capital to take on that kind of risk. Actually, we only started with $500,000-$250,000 in working capital and $250,000 for the firms trading account. Our concept was to secure high volume by offering firm quotes and guaranteed delivery, thus enabling us to absorb small losses. The strategy worked. Within six months, Ragnar was, to the best of my knowledge, trading more over-thecounter-options (OTC) than any other dealer in the world.

I managed Ragnar and horse-traded options along with the other traders in the firm until July 1972, when I took over "running the inventory" from my partner. "Running the inventory" was our term fo r managing Ragnars portfolio of options and stocks. This is what I consider to be the beginning of my career as an independent trader. It was the first time I had complete discretionary control of an account, and as the record in Table P2 on pp. xiixiii shows, I was achieving my objective of consistent profitability.

In 1973 the (Chicago Board Options Exchange) standardized the options business, and we lost some of the competitive edge we had gained by standardizing the business in our own way. But w e bought three seats on the exchange and did over 15% of the volume on the floor in the first year. We continued to compete effectively until July and August of 1975, when my major partner, without my knowledge or consent, traded on a huge scale and lost a tremendous amount of money. Although my trading account was in good shape, we were forced to reorganize the operation to meet our capital requirements after my partners losing trade.

With some quick thinking, we managed to stay afloat. I remember the mee ting we had with Jim Brucki, then the head of compliance on the Qim later came to Interstate, and we became friends). Because of my partners loss, we were in violation of some capital requirements established by the exchange. Jim was a big, gruff man, and he looked at me and said, "What are you going to do about this problem?"

I answered, "Well talk about it, and come up with a way to make the margin requirements for the positions we have on."

Jim said, "Okay, youve got 20 minutes to find a way to stay in business."

1, the partner that lost all the money, and John Bello went into the next room and did some quick negotiating. I bought my major partner out, and put up some more capital to get back into compliance. I managed to keep Ragnar intact, and the rest of us continued operations for another 15 months, until Weeden & Company offered to take on the whole staff, myself included, under very favorable conditions. At Weeden, I became a block trader of the "glamour stocks" -market leaders such as IBM, National Cash Register, and Eastman Kodak. I maintained the existence of Ragnar as a business entity, and I still use it as a trading vehicle today.

Prior to the reorganization, something happened that proved to be the major turning point in my career. I missed the sharp rally in early October 1974 and the subsequent sell off to a 12-year low on the Dow in December. I managed to make money in those months, but it shook me -I had missed a great opportunity to make money. What was I missing? What did I need to leam so that it wouldnt happen again? I asked myself, "What exactly is a trend? What is its nature? How long does it normally last? How high or low does it normally go? What is the nature of a correction? How long does it normally last?" I began to study as I never had before.

DISCOVERING THE NATURE OF TRENDS

To answer these questions, I first had to define, measure, and classify all trends and corrections and identify a standard by which to define "normal." From 1974 until 1976, 1 spent almost every spare moment studying market history via Dow Theory, which gave the best definitions of market movements that I could find. Building on the work that Robert Rhea carried out until his death in 1939, I classified every trend within the Dow Industrial and Transportation averages from 1896 to the present (I keep the study current to this day) as short-term, intermediate-term, and long-term, logging their

extent (how big) and duration (how long) in actuarial tables. Then, using statistical analysis, I reduced the data to terms that I can apply to my trading, specifically in risk assessment. I will discuss how I apply the data later in the book.

It was this period of study that established an essential new element of my approach to forecasting market behavior, an approach that I would leam to apply to the futures markets as well. Without a doubt, the knowledge I gained in those two years of study contributed more than any other single factor to my record at Interstate. My best month, and the best month on record for any trader at Interstate at the time, was September 1982, when I grossed $880,000 with trading capital of $1 million on my Interstate account, and did proportionally well on my two other accounts. The bulk of that months profit came from one market call arising directly from applying the knowledge and statistical methods I had worked out between 1974 and 1976.

As an aside, I want to point out that although this period of intensive study helped me immeasurably in my ability to call the markets, it cost me substantially in my personal life. My daughter, Jennifer, was at a cmcial formative age (three to five), and I spent almost no time with her. I would get home from the office, eat, and go straight back to work in my study. When she came into my office, I would shoo her away impatiently, totally ignoring the fact that she needed her fathers attention and love. It was a bad mistake that both of us are paying for today. If I had it to do again, I would draw out the study period and give Jennifer more time.

I point this out not for the sake of catharsis, but to make a very important point. As I note in the Preface, this book is about attaining and maintaining both financial and personal success. I failed to integrate both at that point in my life, and it was a mistake. I relate this story with the hope that it will help you avoid making similar mistakes. There is a balance in life, and the bottom line is not measured in the dollars you make, but rather in your overall happiness.

After 1974 everything wasnt completely roses on the business end either. In 1983 1 agreed to manage a $4 million fund called Victory Partners. Maybe I was a little cocky, or maybe I did it for the challenge, but I agreed to set it up so that I had to achieve a 25% cumulative retum a fter commissions in order to receive any compensation at all. The first year, I made 13.3% when the market was down 15%. That meant in the next year I had to achieve a minimum retum of almost 40% on the fund!

Intermediate-term trading was terrible in 1984-85. There was very little volatility-the market was flat-and I was forced to move in and out of the market in the short term. While I was making money on my three trading accounts. I lost about 13% for Victory Partners, most of it in commissions. At Inter state I was paying floor brokerage, which was comparable to institutional rates today. With Victory Partners, I paid retail commission rates-about five times higher-which made high tumover trading in a flat market impractical. In addition, program trading began to dramatically affect the nature of the short-term trend, invalidating mles that I had used for years. I recommended that we dissolve the fund, and we did in 1986 ... ouch.

I dont want to give the impression that I use only one particularized method of analysis when making market calls. I always combine technical, statistical, and fundamental economic factors to assess the risk of any speculative position. Only when all three factors point in the same direction do I get involved in any significant way. Moreover, through experience, I have leamed how cmcial it is to be aware of existing or potential govemment intervention in the marketplace. In particular, it is cmcial to be aware of the effects of monetary and fiscal policy as established by Congress, the President, the Federal Reserve Board, foreign govemments. and foreign central banks. You must not only understand the ejects of govemment policy, but you must also be able to anticipate it by understanding the character and intent of the men and women in cmcial positions of power. I will cover some aspects of these areas in coming chapters, and in detail in a second book.

FINDING MY FREEDOM

When Howard Shapiro, a tmly great trader, recmited me to work at Interstate Securities in 1978, it was the best thing that had ever happened to me. Initially. I was put on the payroll and given a $500,000 account with the freedom to trade it with complete autonomy. In 1979 Interstate changed my status to independent contractor, and I founded Hugo Securities, a private trading partnership still in existence. Under this organization I traded Interstates capital, my own, and that of a few smaller partners. The