The Finance Book Club

Chapter 2
Marty’s plan for becoming a trader, developed with his wife’s assistance.

1. Develop a methodology for trading that fits my style
2. Accumulate a grubstake of $100k within one year
3. Make Zoellner my mentor
4. Get a seat on some exchange
5. Take a sabbatical (from his day job, as a securities analyst)

Adam Smith - The Money Game: “The market is like a beautiful woman—endlessly fascinating, endlessly complex, always changing, always mystifying.”

Marty begins reading everything about the market.

 

1. Richard Russell - Dow Theory Letter
2. Barron’s
3. Business Week
4. S&P Trendline charts
5. Mansfield Charting
6. CMI Charting
7. The Reaper - Commodity newsletter by RE McMaster
8. Terry Laundry - Magic T Theory - makes the most sense to him. He calls the author to express his appreciation.

I should do that. But these days how do you just get a hold of someone? Twitter, I guess.

Laundry believes the market spends the same amount of time going up as it does going down. Then it must go up more in the same amount of time, right? I guess I have to read it to find out.

Zoellner is a tape reader.

“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.”

Trading his own account, by 1979 he has ½ his grubstake.

“On Wall Street, the easiest way to receive a pay increase is to change jobs.” (also true off Wall St.)

“If you’re going to trade for a living, you have to give yourself a year. Start with enough money to cover your living expenses, plus enough more so you can trade at a level where you’ve proven you can make money consistently.”

This must be important as it’s in all caps. “YOU HAVE TO PROVE YOUR ABILITIES AND TEST YOUR METHODS BY ACTUALLY TRADING, AND MAKING REAL MONEY, BEFORE YOU DEPEND ON TRADING FOR YOUR LIVELIHOOD.”

Schwartz reveals the $50k he borrowed from his in-laws was ‘just backup’ and he had no intention of actually using it. (but then why borrow it??)

Your grubstake has to be large enough to give you the time to be successful and large enough so that no one trade can take you out.

As a scalper Schwartz’s grubstake could be smaller and his ‘puke point’ could be lower so that he didn’t stop himself out before a market turn.

Earn your grubstake, don’t borrow it.

Chapter 3
To be a winner, you have to be willing to toe the line and pull the trigger.

Schwartz’s childhood involved gambling, flipping for cards, playing the ponies, much like Niederhoffer. I’d be surprised if they weren’t acquaintances.

Preparation pays. It’s essential to know more than the other players in the game.

“If you don’t have a dream, how you gonna make a dream come true?”

“The one thing you have to do when you’re gambling is give yourself plenty of time to rest. It’s like running a race, if you’re not in shape, you’re going to lose.”

Schwartz's rules for Gambling:
1. Never gamble for large amounts. Earn my money through hard work and do not hope for the easy killing for there is no such thing.
2. Never gamble for very much money while on vacation. If one must indulge, make it for small stakes and if the self-discipline is lacking, don’t bring very much money. In fact, only take as much as you can afford to lose, which is indeed very little.
3. Playing for large stakes at the casinos or the horses is absurd. Small wagers for the sport is the only answer.

Don’t beat yourself; if you’ve got a plan that’s working, stick to it. (This is in bold because it applies directly to me. And I'm thinking of you, @21vs7.)

“Good gamblers keep their bets in balance. You have to have a life beyond brokers and bookies.” Does this mean diversify? Or live a balanced life?

Nothing can beat knowing what’s going to happen before it happens, except when it doesn’t. (LOL?)

Keep your priorities straight.

Show me a great trader and I’ll show you someone who understands gambling

3 rules learned while playing Vegas craps:

 

1. Divorce your ego from the game
2. Manage your money - keep a separate account from your broker so that you don’t get swept away by excitement
3. Change tables after a winning streak (possibly the most important, though I didn't understand why until recently)

Chapter 4
On getting a job in the 1970s recession (after an initial rebuff):
‘ “Well, somebody must have given you your first break,” this ‘keeps the conversation going’.

On working as an analyst for a company that he pseudonymizes as ‘The Great Pyramid’ (Madoff & Associates???)

“The disclaimers issued by the independent accounting firms that certified the financial statements in annual reports always said something like, Our examination of these statements was made in accordance with generally accepted accounting principles, and in our opinion, the accompanying balance sheet, statement of income and retained earnings present fairly the financial position of this company.

What these disclaimers really should have said was something like,

We’ve gone through the figures that management gave us, but you gotta realize that generally accepted accounting principles leave a hell of a lot of leeway to dick around with earnings. Plus, this company is paying us a boatload of money to certify these numbers, and if we don’t, they’ll find another independent auditor that will.”

“Nobody on Wall Street ever made a “SELL” recommendation. “HOLD” was as low as you went and a “HOLD” recommendation meant run, don’t walk, to your broker and dump.”

Schwartz tells a long story about working for a firm where every employee is given a pseudonym based on ancient Egyptian history. ‘The Great Pyramid’. I don’t know if this is a reference to an actual name? The story is too long to recap but one of the most interesting parts is when a report he works on is ignored in-house, but as soon as it leaves a briefing and is shared with a rival salesperson it gains traction and becomes the basis for a massive sell-off of healthcare stocks. Since it was not shared in-house the company’s clients take most of the damage. He is brought up for questioning and has to undergo questioning in court. As he observes, if the report had been read by his superiors internally, and not been leaked it would have gone nowhere and done nothing. There is something about ‘outside’ information that holds more sway with people of a certain caste. After this, he finds his reputation is tarnished despite not being responsible for the leak, nor for the initial idea of writing the report.

Also amazing, the name of the American Medical International founder, Uranus J. Appel, which I assumed was also a pseudonym, is in fact a real person. https://www.latimes.com/archives/la-...l25-story.html

Work makes you strong and when you play a rumour, you have no strength.
You are what you eat, and garbage makes you weak.

Tipsters are usually self-serving.

Chapter 5
"I discovered an interesting correlation between the Canadian and American gold stocks and the price of gold itself. The stock prices tended to rise and fall before the price of gold, which made them a leading indicator for gold prices."

“I stopped playing the ASA options as much because when the gold stocks slowed down, my advantage was gone. I was quick with numbers, I was disciplined, I had the charts and the methodology, and the market was moving so fast that very few people could keep up with it. When gold cooled down, any old junkyard dog in a blue smock could understand it. We moved on to trade Merrill Lynch at the start of the new bull market in 1982.”

“I’ve still got my Kruggerands and Maple Leafs squirrelled away in a safe-deposit box. They’ve been a horrible investment. I bought most of them in the late seventies and early eighties when gold was near its all time high. My average cost is around $500 an ounce and now, almost twenty years later, the price is close to touching $300 an ounce. I’ve come to the conclusion that unless Auric Goldfinger resurfaces and nukes Fort Knox, I’m never going to make any money by owning gold.” LOLZ. Must be 1996. <Checks> 1998.

Attached Image (click to enlarge)

Do you expect me to stack?
No, Mr. Bond I expect you to buy! Bitcoin.

“That’s what rich people do. They spread their wealth around. They hide some here and some there so they’re always able to get their hands on something if everything goes into the crapper.”

Chapter 6
The favourable tax status of futures profits comes from the history of tax straddles, an investment strategy that was outlawed by the IRS in 1981. The CBOT and CME, who made large profits on tax straddles, lobbied congress, but lost. However a concession was made in the Economic Recovery Tax Act of 1981 to tax 60% of any gains (in futures) at the long-term capital gains rate (20%) rather than as ordinary income (50%). This ‘defied all logic’ says Schwartz, but it was ‘absolutely Nirvana’.

Schwartz can put up treasury bills as his performance bond (margin), earn interest on that money, get 20:1 leverage and as long as he was winning, there was no cost of capital.

“All new instruments are unpredictable. When they first trade, everybody’s trying them out, the volumes are erratic, and it’s tough for the exchanges to maintain orderly markets.”

“What I’d do was divide the trading day into half-hour blocks, just like the Merc did, and each half hour, I’d chart the rate of change. I viewed momentum during the day just like the tides, two high and two low, ebb and flow, back and forth. If the S&P 500 composite index was up $0.50, then up $0.30, then up $0.10 in three consecutive blocks, then I knew that the momentum was shifting. The sine curve was about to turn down, the market was coming to a stoplight, it was time to switch gears. Red light, green light, go short, pull the trigger.”

“Everything in this business is about finding disequilibrium, that’s what produces opportunity, and I knew that the Telerate (quote machine) would help me play the bond futures.”

“It wasn’t perfect, but most of the time, significant after-hours moves in the cash bond resulted in similar moves in the S&Ps the following day. More important, these moves fit right into the patterns established by my primary indicators: the Magic T, my ten-unit exponential moving average, my oscillators and stochastics.”

“When you’re a market timer, you have to be equally good at going short and going long, and when the market changes sides, you can’t hold your position and hope it turns around.”

Going short’s a game for the pros.

Chapter 7
Marty trades with his wife in a space they borrow from Bear Sterns, the clearing house. She reinforces his convictions whenever he’s hesitant to pull the trigger.

When she leaves to go buy a mink coat with her mother, Marty irrationally goes short a rising bull market post-election. He has a ‘sunspot theory’ which says that 2% of the time, you become uncontrollably irrational. By market close he is short 250 contracts of S&P, cursing himself on the drive home.

For Audrey the money isn’t real and she doesn’t get emotional. It’s clear that Audrey is the real trader here.

You can’t outsmart the market.

Marty takes Zoellner and Audrey’s advice (but under duress), sells out of his position, only ends up losing $800k and makes it all back a couple of months later.

The best way to end a losing streak is to cut your losses and divorce your ego from the game.

“YOU MUST CHANGE THE DIRECTION OF BAD TRADING BY FIRST SHIFTING TO NEUTRAL. YOU MUST STOP.” As fear of losing rises, emotions short-circuit intellect and confidence. Stopping allows emotions to calm down and re-establish momentum/intellect.

Once you come back, trade small. Don’t try to make a killing.

If this doesn’t work, stop longer. Trade smaller. Eventually the ‘black ink will flow again’.

Confidence is essential to trading.

Chapter 8
Before 1983 traders toiled in obscurity, mostly, unless they went broke in a big way. Then came contests such as the Financial Traders Association - Stock, Option & Commodity Trading Championship. Run by Norm Zadeh, the Don King of Trading. Author of Winning Poker Systems.

“For me,[...]trading was a lot like a prizefight. I’d divide the day into fifteen rounds running from 9:00 A.M. when bonds started trading to 4:15 P.M. when the S&P futures pit closed. I patterned this approach after the Merc in Chicago, which divided its trading day into half-hour blocks, or “brackets,” and released many of its trading statistics at the end of each bracket. Because trading volumes often picked up just before the hour and the half hour when the numbers
came out, anyone who traded futures on the Merc for any length of time got used to thinking in terms of these brackets.

“I was a boxer-counterpuncher. Timing was my key. I’d spot an opening, hit it, and jump back. In and out, in and out, bob and weave, a point here, a point there. I didn’t take wild swings, because I never wanted to do anything that would jeopardize my family’s security.”

“I outpointed the market by trying to win every round, and if I could help it, I never put myself into a position where I could be knocked out. It was a safe, unspectacular approach that didn’t give me too many big victories.”

“For two hundred days a year, I’d end up with reasonably small losses netted out with similar-sized gains. Lose $5,000 here, make $6,000 there, round after round, twenty, thirty, forty times a day. But I’d win the other fifty trading days by clear-cut unanimous decisions. Smack the bonds for $75,000, hit a stock for $100,000, nail a couple of options for $125,000, pound the S&Ps for $150,000. Over time it made me a big winner, to the tune of $5 million a year.”

The contest initially only had a minimum investment of $5000 so it was basically open to all comers. This puts Schwartz at a big disadvantage because he refuses to trade a smaller account just for the contest. Trading a small account and swinging for the fences is how he went broke for nine years, so he just won’t do it.

Schwartz figures that with the low fees, and low number of entrants what Zadeh is really after is to piggyback on the trades of the entrants. Schwartz doesn’t care because he has a seat at the exchange. “There was no way that anybody, except maybe the boys in the pit on the Merc, could steal from me.”

“I can tell you how I became a winner—I learned how to lose.”

The contest goes through many ups and downs, becoming more popular each year, and the rivalry between Schwartz and another trader named Frankie Joe gets more heated. Eventually Schwartz wins by a narrow margin on the last day of the contest in 1984.

Frankie Joe basically predicts his own death a year later. Trading is very stressful. (when it’s done wrong)

Schwartz admits the contests lack scientific accountability, being essentially unverified, but he credits them with helping him move into the limelight.
“When they (his sons) got a little older and the other kids started asking them what Daddy did for a living, they could say, “My daddy’s the Champion Trader!” That was all I cared about.” (Frankly, I care about this too, though I know I probably shouldn’t. My kids constantly want to know how much I’m making. I just hope I’m not harming them by not going to an office every day.)

Schwartz closes this chapter with the standard wisdom about stops. They are there to protect you and mark the line in the sand where you admit you’re wrong, divorce your ego/emotions, and move on rather than holding on to a losing position hopelessly.

Joe Granville: the market doesn’t care if you’re long or short. This, though, I think is wrong. The market definitely cares, and it is trying to get one over on you. Either today or next year, it’s waiting for a chance to take all your money, and knowing which way you’re trading is an invaluable part of that.

Amateurs know how much of a profit they’re willing to take, but they don’t have the foggiest idea how much they’re willing to lose. They freeze when a position goes against them and they beg, plead, hope, complain. (or post bitchy comments on internet forums!)

You don’t just lose money when you get caught out; you lose objectivity. Exiting a trade restores objectivity.

Chapter 9
Negative thinkers are losers.

For many traders making money is the goal, because their egos want the power that money brings. Schwartz spends a lot because he wants to live the sweet life now, and this cuts into his bottom line.

Don’t trade too heavily the month before and two months after your wife gives birth. (and if she has twins - multiply recovery time by 3)

During the first three months of his daughter’s birth he loses $150k.

(At the time) In the Chicago Mercantile Exchange (CME) or ‘Merc’, front-running is accepted practice.

In his first 3 years of trading the S&P contract, it moved slower, and he plays an ‘accordion’. He places a grid of 50 lots, buying five lots every ten cents (two ticks) down (basically a grid?). By the time it reversed, hopefully he would have bought most of his scale but not all of it. Then he would scale out the same way. Scale-trading.

Another quirk of the Merc is they have a pit committee that can actually go back in the trade history and remove (“whistle out”) any past trades that are deemed in violation of some rule. The committee is made up of the most profitable members which of course lends itself to all sorts of abuses.



Schwartz tells a story that reminds me of exactly the sort of BS you encounter trading retail forex. He was long ten lots. He sees the market reach a peak. He orders the ten lot sold. The market comes down as predicted but he can’t get confirmation of his fill. After 10 minutes he finds out that his two sell trades have been ‘whistled out’ and he was still long the ten lot but now it’s a losing trade. He calls the legal department and threatens to go on the record. They say they’ll look into it and nothing happens. He’s not a member of the club.

“When they whistle a trade out, they merely take out the printed record as though it never happened—it was just a mistake. It’s been going on forever.”

“Unless I moved to Chicago and climbed into the pit to fight for myself, there was nothing I could do about it; there was always going to be some slippage. Slippage was the price you paid for doing business in Chicago.

The unofficial Chicago motto: Ubi est mea? Where’s mine?

Despite $25 commissions (amounting to 20% of profits or $600k) and ‘slippage’ Schwartz still clears $3M. Eventually he is forced to move to a cheaper clearing house. Then later he springs for an Index Options Membership (IOM) membership in the Merc. A seat at the table.

The clearing house employs a big guy, Johnny, 6’5’’ and 280lbs to work in the pit and ‘straighten out’ disagreements over filled orders. “Big guys did well at filling orders, and Johnny had 280 ways of persuading whoever was on the other side of the trade that they’d made a mistake.” (high finance! lol)



Everything’s going great so far so of course we need some drama. His clearing house has been involved with some other firm that has gone belly up and they can’t trade. In a highly entertaining chapter Marty gets steadily more squirrelly as he calls his clearing house secretary, her boss, his lawyer, his friends at Bear Stearns, and so forth, trying to get answers. Of course nobody knows anything and everyone is ‘looking into it’.

““DON’T FUCK WITH ME!” I screamed into the phone. “That’s a regulated account. It’s inviolate. You know, you guys aren’t the only ones with clout in Washington. If you don’t get me my money by the end of the day, I’m calling the CFTC and I’m telling them about all the crap that goes on out there. I’m on record.” Yadda, yadda, yadda! I called Kornstein. I called Margolis. I called Debbie. I called Zoellner.”


Eventually Marty gets his money back but at a new firm that has been assigned to him. He doesn’t know how it worked out but figures the Merc Club boys got together and decided to take the hit because otherwise the scandal would ruin the exchange’s reputation.

“I love talking to other good traders because I’m very willing to share information. I don’t mind giving as much as I get, and now Mark sends me his faxes and we trade market strategies.” Sounds like a good deal.

‘Mark’ is Mark Cook whom we met here. The lessons he imparts are in that post.

Chapter 10
Auctions and markets have similarities; I think that’s the point of this chapter.
The Schwartzes get into art-collecting.

Buy only the best inventory. That gives you the best liquidity.

Schwartz compares art gallery BS to market BS. They’re both BS.

Schwartz compares an art auction to the ASE pit. The art auction is much quieter and you can’t see where the bids are coming from.

“Auctions play on the bidder’s emotions so the idea was not to go crazy, to set a firm quitting point and to stick to it.”

Schwartz spends a fortune on art but of course he sells it for more than he paid and earns handsome profits in months. (Rich people have no shortage of ways to make more money.)

Chapter 11
Marty Zweig lives in Schwartz’s building so when he makes his famous 1987 crash prediction on TV he invites him over to talk about it. His forecast was for the next few weeks/months, not the following day so they are both taken by surprise. As so often happens with forecasts - once we can see something, it’s already nearing completion.

Being able to honour your stops is what separates the top dogs from the mongrels on Wall Street.

At the opening bell (Black Monday), the market plunges 150 points and his long positions get murdered. He freezes and can’t honour his ‘uncle points’ (stop losses). So much for marine training.

He waits for support, (foolishly?) and gets it, as the DOW rallies 100 points off the lows. He immediately sells at the market and although he loses a lot of money he considers it ‘one of the greatest trades of my life’.

Whenever there’s a crisis Schwartz goes for his gold in his bank's lockboxes. "To protect his family". He lugs $300k worth of gold down the street in a briefcase looking for a cab.

“It’s going down, Audrey. Everything. The whole damn system. I saw the limos. The boys in the club, they’re all meeting at Rockefeller’s.” I got up and wobbled into my office. It was 1:30; the market was down 265 points. Capitalism was crumbling before my eyes.” Can anyone this dramatic and imaginative be a good trader?

Curiously, when he goes to empty out his chequing account we discover he has less than $30k in it.

Schwartz also claims the whole financial system avoided narrow collapse only because Greenspan opened the discount window. But they can always do that which is why the system won’t collapse until the Fed has completely lost the faith of the people.

Schwartz tells an interesting story I hadn’t heard before - about the market bottom falling even further and then recovering rapidly. The cause was George Soros panic-selling. He lost $800M and ended up suing his broker. “I just remember it as the day I out-traded the great George Soros.”

“When it gets so bad that you want to puke, you probably should double your position.”

The last part of the chapter is the story of Bob Prechter, the prophet of Elliott Wave who gained a massive following but then became a perma-bear after the crash. Schwartz tries to convince him to wait for the actual downturn but he refuses to listen to reason and quickly loses his followers.

“You may be sure you’re right, but the market is never wrong.”

“Bob himself has now publicly conceded that he’s been wrong for so long, he’s lost confidence in his ability to pick the top, and until he decides that it’s easier and more profitable to go with the flow, he’ll remain sitting down by the lake, waiting for the tidal Wave.”

And yet this is still probably one of the most popular methods of charting the market.

Chapter 12
To trade successfully, I needed my rest and at least three hours of nightly preparation.

All traders are weird in some way.

Helmut Weymar chairman and CEO of Commodities Corp. - “Computers are a great tool,” he said, “but you’ve still got to get your hands dirty with data.”

Commodities Corp (CC) offer him $250k to trade with and he turns it down. They offer him $10M and at first he doesn’t like it. Trading with more money seems to demand a longer time horizon and he doesn’t adjust well to this. He stops trading the account and Weymar calls him to find out why, gives him a pep talk and assures him they don’t want him to change his style.

He tries again and makes $700k for them over 2 months.

At the CC dinner he’s asked his opinion about the price of oil. He admits he has no idea about the long-term price and he doesn’t care, but currently it’s above his moving averages so it’s in a bullish mode. He thinks nothing of it but over the next 3 days oil goes up sharply and he realizes that giving his opinion in front of all these big traders, including Paul Tudor Jones, has spurred this mini-rally. They’re all covering their shorts or getting long for their accounts. He kicks himself for not figuring this out sooner.

Anyone playing the market has to follow the Wall Street Journal every day.

While reading it he keeps notes on a steno pad. “In the marines, a good, responsible officer keeps copious records.”

He checks

1. ‘What’s News’
2. The lead story
3. No articles - just a feel for the news
4. Summary of the prior day’s events - ‘Abreast of the Market’
5. ‘Heard on the Street’ comparing the rumours to what he hears from his source
6. Listed Options Quotations - to get a feel for put/call ratios
   1. Ratios close to 100% for 2-3 days are buys
   2. Below 50%, too much optimism - sell

7. NYSE highs and lows
8. Bond column to see interest rate forecasts
9. Takes less than 10 minutes to go through everything

NIce thread, I'm new to the community and I can see this is going to be an amazing learning journey for me.

Welcome to the community!


Just kidding! Kind of.

Chapter 13
Schwartz has the enviable problem of making millions of dollars when he wants to make tens of millions of dollars. He can do this by trading OPM (other people’s money) but he doesn’t like the hassles of working with clients - checking in regularly, fending off their concerns and interference, deciding if the trade is for him or for them, etc. (and who can blame him?)

He wants complete freedom but he also wants to be able to ‘strut around’ in the company of Paul Tudor Jones and Bruce Kovner. To ‘sniff around’ with the top dogs he needs OPM and there’s always strings attached.

He rents a big fancy office in NY, outfits it with expensive art, updated computers, phones, and hires two employees at $20k/month.
Now he has to ‘dig up’ some investors. One set for his domestic and one for his offshore fund.

Hedge funds had changed a lot since the 60s. They’re no longer just fund managers acting as the general partner with limited partners as qualified investors, limited to 99 in total.

Managers like Soros, Julian Robertson, Michael Steinhardt, had raised billions and couldn’t find enough good US stocks so they focused on bigger leverage plays in offshore funds that were not regulated by the SEC. They began speculating in currencies and interest rates. Schwartz’ funds are called Sabrina Partners LP (domestic) and Sabrina Offshore Funds Ltd. (I’m always curious how managers select the names for their funds. They seem to be unaffiliated with the personnel in any way.)

Min investment is $1M. No withdrawal for 1 year. 4% fixed management fee, plus 20% of profits. He stresses that he trades stocks, options, and futures (triple threat). Emphasis on track record. He’s got legends like Schwager and Liscio to back him up.

He writes down the name and number of everyone he knows with $1M+ on index cards and calls them, writes them, meets them for drinks, sends prospecti (prospectuses??), clippings of Liscio’s article about him, and copies of Schwager’s book. He supports their charities, mails more prospectus copies, more clippings, more calls, invites them to his new office. Within the year he has raised $22M, but $5M is his own money.

Finding international investors usually requires brokers who have international contacts and could make introductions. He finds one broker who wants 25% of his referral’s business. Schwartz counters with an offer to trade contacts for commissions.

As he’s leaving for a meeting with a broker who accepts his terms, he sees the market is in freefall and cancels his trip. “Personal upheavals like death, marriage, or sickness are unacceptable excuses for a trader to miss a meeting, but canceling to make money is eminently acceptable.”
If anything this only enhanced his reputation with the prospective client.

He buys bond futures, expecting that people will move their money from stocks to bonds in a crisis. Everyone is expecting a repeat of ‘87 but Schwartz senses it’s different. P/Es are lower, interest rates were lower. He’s thinking of going long.

Liscio calls him to get his take. His bullish opinion is published in Barron’s on Monday. He buys stocks that had held up during the Friday mini-crash. The market doesn’t even open down on Tuesday and rides the position through to noon. Then he reverses and shorts S&P futures because now everyone is buying. He covers everything on Wednesday. Postponing for a week made him $500k.

In London he meets his new international broker, the Indian investor procured by that broker, as well as a real-estate developer sheikh, a London middle-eastern bank branch manager, and a former chairman of a British holding company known for hostile takeovers.

As it turns out he doesn’t have to do much selling because the Barron's article has already done it for him, by comparing him to 4 other great traders. The article mentions he made $500k before leaving on his trip.

“I felt like Donald Trump. When you listen to Donald Trump talk, he always sounds so assured. He’s probably full of it, but he’s out there selling his best product, himself. Even though only his therapist knows the truth, Donald Trump sounds like he believes in himself more than anything else on the face of the earth.” If you only knew what I know, Marty.

He spends the rest of the day being fêted by the sheikh at some baron’s mansion where he meets Benazir Bhutto (all decked out) and parties til late in the night, surrounded by extravagant opulence - which he just loves.

After a few weeks of being the Toast of London, he returns home and he starts getting wire transfers from various exotic tax shelters.

The orders have no names, just numbers and he doesn’t know who his investors are. (Surely this was illegal even back then??)

“I was told not to worry, (by whom???) I didn’t have to know whose money it was. All I had to do was make more and everything would be fine and everyone would be happy.”

Chapter 14
Before the end of the first year he asks his investors if they’re going to stay with the fund. How? He doesn’t even know who they are, remember?
If one client bails, they all will, at this level.

The 4 and 20 management fee structure is an issue because only pure futures funds charge this. Equity funds charge 1 and 20. His funds are set up to trade only 25% futures and 75% equities.

He was outperforming the index with 18% gross return.
18 - 4 = 14
14 x 0.2 = 2.8; so he’s getting 2.8% of profits and 4% in management fees annually.
That’s 6.8% of the 18% gross return, meaning he’s skimming more than ⅓ of the ‘action’ and his investors are beginning to grumble.

The other issue is the market has become ‘erratic’. No trends. He tries investing in takeover deals but this doesn’t pan out and he goes down 6% or 2.4M of the $40M he raised.

He cuts his positions and starts taking profits when he can. This works and in March he’s up 7.6% when the NYSE is down 4.2%. Beating the index by 11.8% over 3 months is ‘extraordinary’ for any reasonable investor. This success convinces him to accept new money and he raises another $30M.

Schwartz is a control freak and has no ‘young turks’ to assist him. He’d already fired the two ‘old turks’ he hired previously and was doing all trading solo.

When the market rallies he misses much of it and the investors are unhappy because his returns, based on small profits, underperform the market. He explains his philosophy (being profitable every month) but no one is appeased.

The foreign middlemen would call 2-3 times a day, even though they were locked in for a year anyway.

Marty has a plan to go on the offensive to end the year big. He gets a tip from a fellow hedge fund manager, “an oily operator” and confirms it with his ‘inside guy’. He starts to load up on the stock. This is his genius plan? A tip??

He puts over half the funds money in ‘Upjohn’ and when Saddam invades Kuwait the market drops. He hedges with S&P shorts but doesn’t get the Beta right, using only $40M in futures when he actually needs $80M.

The top dogs were going long commodities while he’s buried under this one declining stock.

His investors complain about the lagging returns compared to Jones, Kovner and Bacon.

After meeting with some big dog traders (Druckenmiller, and his wife Fiona Biggs, who is the niece of Barton Biggs) at a dinner hosted by a middleman who matches wealthy investors with hot fund managers, he realizes he has to do something to stay with the pack.

He begins to sell off all his Upjohn stock. He sends a letter to his investors telling them about some changes.

Schwartz changes his investment mix to 50/50 futures/equities. Allows investors to make a mid-year withdrawal at a 1% accounting fee. The fund will also automatically terminate if losses = 35% of start of year capital.

“Successful businesspeople, whether they’re traders, investors, entrepreneurs, whatever, CANNOT LET FRIENDSHIPS OR FAMILY RELATIONSHIPS GET IN THE WAY OF MAKING SOUND DECISIONS ABOUT MONEY.” A tough one for me.

Can't wait for Chapter 15.

Cheers.

Chapter 15
Marty gives his wealthiest clients insulting pseudonyms in this chapter. I guess it’s because they’re his most vocal critics.

OPM is the only way to make the big money but they’re always watching over his shoulder and they’re never satisfied.

Marty weighs 208lbs and is having some health problems. 4 fewer than me. I gotta get back in shape!

He gets pneumonia and nearly dies just as his investors are beginning to flee the fund.
The pneumonia gets treated with antibiotics but he then gets pericarditis.
That causes his heart to constrict and they have to operate. Schwartz goes into every detail of his hospital stay in gory realistic detail. Must get back in shape!

He recovers enough to go home but is ordered to avoid stress. Instead he trades. The market doesn’t cooperate because when does it ever?
Of course he gets sick again. They might have to remove his pericardial sac.

Despite being near death’s door all Marty really cares about is showing up the investors who are abandoning ship. He is living for revenge.

Marty’s broker poses as a doctor to get into the CCU to tell him how his bonds are doing.
Finally he gets put on steroids and recovers.

The lesson from all of this for Marty is that OPM isn’t worth it. “No amount of money is worth working for people who don’t care anything about you.”
“I’d found out that I was a pure trader. I didn’t like people looking over my shoulder, and I didn’t want to be responsible to people whom I didn’t like. I just wanted my freedom, and my health.”

“WHEN YOU’RE IN A LOSING POSITION AND YOU’RE BRAINLOCKED, DO WHATEVER’S NECESSARY TO HELP CLEAR YOUR HEAD.”

“Nobody Ever Lay on Their Deathbed Wishing They’d Worked Harder”

“I’ve learned through the years that after a good run of profits in the markets, it’s very important to take a few days off as a reward.”

Live in the moment.

Chapter 16
This chapter is a detailed description of a trading day as Schwartz fights to keep his fund alive. He compares himself to a soldier in the marines and uses military symbolism to describe how he outlays strategy and tactics with military precision. He also intersperses each passage with famous dialog from war movies like Platoon.

“When you can, always have at least two of everything and spread your business around. You don’t want to be sole-sourced, or they’ll take you for granted. You get the best deals and the best service by having more than one broker and playing them off against each other.”

Despite having planned this ‘advance’ in advance, Marty doesn’t have accounts set up to short oil and gold. I suppose we can blame his hospitalisation.

Marty calls his wife, a ‘camp follower’.

There is a “tendency for traders to buy early in the day and early in the week and to sell late in the day and late in the week in a bear market.”

You never know what’s BS until you check it out yourself. Keep an open mind, be a good listener, respect experience, keep trying and keep testing.

Chapter 17
Schwartz tells the story of how he winds down the partnership. He wants to focus on his health and have a less stressful life. At the start of the chapter he wants to grow his fund bigger than a rival, “Porky”, but by the end, he realizes some things are more important than money.

Despite his pledge to trade less, he is still compulsive.

“I had to get out of New York because Landis was right, I was addicted to trading. If I stayed in New York with my old friends and my old lifestyle, I’d keep falling off the wagon and sliding back into Porkyism.” Good advice for anyone trying to squash a bad habit.

Chapter 18 - The Pit Bull Guide to Successful Trading
This big chapter is almost a book by itself. I've split it up into multiple sections/posts.

Trading style: Marty is a scalper, if you hadn’t already guessed.

Strengths: dedication to hard work, dogged persistence, ability to concentrate for prolonged periods, and a hatred of losing.
Weaknesses: insecurity, fear of losing, and a need for constant reinforcement and frequent gratification.

Marty can’t let his profits run; he needs to be in and out within minutes if possible. He needs a 70-80% win rate.

Tools of the Trade: all outdated imho.