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THE NEW MARKET WIZARDS

Contents (THE NEW MARKET WIZARDS )

THE NEW MARKET WIZARDS Preface 4

Acknowledgments 5

Prologue 6

PART I Trading Perspectives 7

Misadventures in Trading 8

Hussein Makes a Bad Trade 11

PART II The World’s Biggest Market 12

Bill Lipschutz: The Sultan of Currencies 13

PART III Futures-The Variety-Pack Market 33

Futures-Understanding the Basics 34

Randy McKay: Veteran Trader 35

William Eckhardt: The Mathematician 45

The Silence of the Turtles 57

Monroe Trout: The Best Return That Low Risk Can Buy 61

AlWeiss: The Human Chart Encyclopedia 71

PART IV Fund Managers and Timers 74

Stanley Druckenmiller: The Art of Top-Down Investing 74

Richard Driehaus: The Art of Bottom-Up Investing 84

Gil Blake: The Master of Consistency 91

Victor Sperandeo: Markets Grow Old Too 98

PART V Multiple-Market Players 107

Tom Basso: Mr. Serenity 108

Linda Bradford Raschke: Reading the Music of the Markets 113

PART VI The Money Machines 119

CRT: The Trading Machine 120

Mark Ritchie: God in the Pits 122

Joe Ritchie: The Intuitive Theoretician 130

Blair Hull: Getting the Edge 138

Jeff Yass: The Mathematics of Strategy 147

PART VII The Psychology of Trading 154

Zen and the Art of Trading 155

Charles Faulkner: The Mind of an Achiever 156

Robert Krausz: The Role of the Subconscious 165

PART VIII Closing Bell 172

Market Wiz(ar)dom 173

A Personal Reflection 181

Appendix: Options – Understanding the Basics 182

Glossary 184

Preface (THE NEW MARKET WIZARDS )

Here’s what I believe: 1. The markets are not random. I don’t care if the number of academicians who have argued the efficient market hypothesis would stretch to the moon and back if laid end to end; they are simply wrong. 2. The markets are not random, because they are based on human behavior, and human behavior, especially mass behavior, is not random. It never has been, and it probably never will be. 3. There is no holy grail or grand secret to the markets, but there are many patterns that can lead THE NEW MARKET WIZARDS to profits. 4. There are a million ways to make money in THE NEW MARKET WIZARDS  markets. The irony is that they are all very difficult to find. 5. The markets are always changing, and they are always the same. 6. The secret to success in the markets lies not in discovering some incredible indicator or elaborate theory; rather, it lies within each individual. 7. To excel in trading requires a combination of talent and extremely THE NEW MARKET WIZARDS  hard work-(surprise!) the same combination required for excellence in any field. Those seeking success by buying the latest $300 or even $3,000 system, or by following the latest hot tip, will never find the answer because they haven’t yet understood the question. 8. Success in trading is a worthy goal, but it will be worthless if it is not accompanied by success in your life (and I use the word success here without monetary connotation). In conducting the interviews for this book and its predecessor. Market Wizards, I became absolutely convinced that winning in the markets is a matter of skill and discipline, not luck. The magnitude and consis- tency of the winning track records compiled by many of those I interviewed simply defy chance. I believe the Market Wizards provide role models for what it takes to win in the markets. Those seeking quick fortunes should be discouraged at the onset. I have strived to reach two audiences: the professionals who have staked careers in the markets or are serious, students of the markets, and the lay readers who have a general interest in the financial markets and a curiosity about those who have won dramatically in an arena where the vast majority loses. In order to keep the book accessible to the layperson, I have tried to avoid particularly esoteric topics and have included explanations wherever appropriate. At the same rime, I have strived to maintain all core ideas so THE NEW MARKET WIZARDS  that there would be no loss of meaningful information to those with a good working knowledge of the markets. I think this book should be as meaningful to the layperson as to the professional simply because the elements that determine success in trading are totally applicable to success in virtually any field or to achieving any meaningful goal.

THE NEW MARKET WIZARDS
THE NEW MARKET WIZARDS

Acknowledgments (THE NEW MARKET WIZARDS )

My thanks to those who graciously agreed to be interviewed for this volume, freely sharing their thoughts and experiences while refraining from requests for cosmetic changes when presented with the finished manuscript for review. (Not all those I interviewed proved as accommodating; the exceptions do not appear in this book.) In a number of cases, the traders I interviewed had nothing to gain from participating, at least not monetarily, as they either do not manage any public THE NEW MARKET WIZARDS  funds or are not open to further investment. I am particularly appreciative of their cooperation. I would like to thank my wife, Jo Ann, for reading the original manuscript and providing some well- directed suggestions, all of which were taken. Mostly, I must thank Jo Ann for enduring yet another year as a “book widow,” not to mention keeping the kids quiet so that I could sleep in the mornings after those all- night writing sessions. My three wonderful THE NEW MARKET WIZARDS children-Daniel, Zachary, and Samantha-were as understanding as could possibly be expected for any group aged eight, seven, and three in accepting all those hours stolen from our time together and activities foregone as a result of my involvement in this work. Finally, I would like to thank the following friends for their suggestions and advice regarding potential interview candidates: Norm Zadeh, Audrey Gale, Douglas Makepeace, Stanley Angrist, Tony Saliba, and JeffGrable.

Prologue The Jademaster (THE NEW MARKET WIZARDS )

One cold winter morning a young man walks five miles through the snow. He knocks on the Jademaster’s door. The Jademaster answers with a broom in his hand. “Yes?” “I want to learn about Jade.” “Very well then, come in out of the cold.” They sit by the fire sipping hot green tea. The Jademaster presses a green stone deeply into the young man’s hand and begins to talk about tree frogs. After a few minutes, the young man interrupts. “Excuse me, I am here to leam about Jade, not THE NEW MARKET WIZARDS  tree frogs.” The Jademaster takes the stone and tells the young man to go home and return in a week. The following week the young man returns. The Jademaster presses another green stone into the young man’s hand and continues the story. Again, the young man interrupts. Again, the Jade-master sends him home. Weeks pass. The young man interrupts less and less. The young man also learns to brew the hot green tea, clean up the kitchen and sweep the floors. Spring comes. One day, the young man observes, “The stone I hold is not genuine Jade.” I lean back in my chair, savoring the story. My student interrupts. “OK. OK. That’s a great story. I don’t see what it has to do with making money. I come to you to find out about the markets. I want to learn about the bulls and the bears, commodities, stocks, bonds, calls and options. I want to make big money. You tell me a fable about Jade. What is this? You …” “That’s all for now. Leave those price charts on the table. Come back next week.” Months pass. My student interrupts less and less as I continue the story of The Trader’s Window.

Misadventures in Trading On the lecture tour following the completion of this THE NEW MARKET WIZARDS  book’s predecessor, Market Wizards, certain questions came up with reliable frequency. One common question was: “Has your own trading improved dramatically now that you’ve just finished interviewing some of the world’s best traders?” Although I had the advantage of having plenty of room for dramatic improvement in my trading, my response was a bit of a copout. “Well,” I would answer, “I don’t know. You see, at the moment, I’m not trading.” While it may seem a bit heretical for the author of Market Wizards not to be trading, there was a perfectly good reason for my inaction. One of the cardinal rules about trading is (or should be): Don’t trade when you can’t afford to lose. In fact, there are few more certain ways of guaranteeing that you will lose than by trading money you can’t afford to lose. If your THE NEW MARKET WIZARDS  trading capital is too important, you will be doomed to a number of fatal errors. You will miss out on some of the best trading opportunities because these are often the most risky. You will jump out of perfectly good positions prematurely on the first sign of adverse price movement only to then see the market go in the anticipated direction. You will be too quick to take the first bit of profit because of concern that the market will take it away from you. Ironically, overconcem about losing may even lead to staying with losing trades as fear triggers indeci-siveness, much like a deer frozen in the glare of a car’s headlights. In short, trading with “scared money” will lead to a host of negative emotions that will cloud decision making and virtually guarantee failure. The completion of Market Wizards coincided with my having a house built. Perhaps somewhere out in this great country, there is someone who has actually built a house for what they thought it would cost. But I doubt it. When financing the building of a house, you find yourself repeatedly uttering that seemingly innocuous phrase, “Oh, it’s only another $2,000.” All those $2,000`s add up, not to mention the much larger sums. One of our extravagances was an indoor swimming pool, and to help pay for this item I liquidated my commodity account-in the truest sense of the word. It was my sincerest intention not to resume trading until I felt I had adequate risk capital available, and THE NEW MARKET WIZARDS  an unending stream of improvements on the house kept pushing that date further into the future. In addition, working at a demanding full-time job and simultaneously writing a book is a draining experience. Trading requires energy, and I felt I needed time to recuperate without any additional strains. In short, I didn’t want to trade. This was the situation one day when, in reviewing my charts in the afternoon, I found myself with the firm conviction that the British pound was about to collapse. In the previous two weeks, the pound had moved straight down without even a hint of a technical rebound. After this sharp break, in the most recent week, the pound had settled into a narrow, sideways pattern. In my experience, this type of combined price action often leads to another price decline. Markets will often do whatever confounds the most traders. In this type of situation, many traders who have been long realize they have been wrong and are reconciled to liquidating a bad position-not right away, of course, but on the first rebound. Other traders who have been waiting to go short realize that the train may have left without them. They too are waiting for any minor rebound as an opportunity to sell. The simple truth is that most traders cannot stand the thought of selling near a recent low, especially soon after a sharp break. Consequently, with everyone waiting to THE NEW MARKET WIZARDS sell the first rally, the market never rallies. In any case, one look at the chart and I felt convinced this was one of those situations in which the market would never lift its head. Although my strong conviction tempted me to implement a short position, I also felt it was an inappropriate time to resume trading. I looked at my watch. There were exactly ten minutes left to the close. I procrastinated. The market closed. That night before leaving work, I felt I had made a mistake. If I was so sure the market was going down, I reasoned, I should have gone short, even if I didn’t want to trade. So I walked over to the tewnty-four-hour trading desk and placed an order to go short the British pound in the overnight market. The next morning I came in and the pound was down over 200 points on the opening. I THE NEW MARKET WIZARDS placed a token amount of money into the account and entered a stop order to liquidate the trade if the market returned to my entry level. I rationalized that I was only trading with the market’s money, and since my plan was to cease trading on a return to breakeven, I was not really violating my beliefs against trading with inadequate capital. Thus, I found myself trading once again, despite a desire not to do so. This particular trade provides a good illustration of one of the principles that emerged from my interviews for Market Wizards. Patience was an element that a number of the supertraders stressed as being critical to success. James Rogers said it perhaps most colorfully, “I just wait until th’ere is money lying in the comer, and all I have to do is go over there and pick it up. I do nothing in the meantime.” In essence, by not wanting to trade, I had inadvertently transformed myself into a master of patience. By forcing myself to wait until there was a trade that appeared so compelling that I could not stand the thought of not taking it, I had vastly improved the odds. During the next few months, I continued to trade and my equity steadily increased, as I seemed to be making mostly correct trading decisions. My account grew from $0 (not counting an initial $4,000 deposit that was quickly withdrawn once profits more than covered margin requirements) to over $25,000. It was at this juncture, while traveling on a business trip, that nearly all my positions turned sour simultaneously. I made some hasty decisions between meetings, virtually all of which proved THE NEW MARKET WIZARDS  wrong. Within about a week, I had lost about one-third of my gains. Normally, when I surrender a meaningful percentage of my profits, I put on the brakes, either trading only minimally or ceasing to trade altogether. Instinctively, I seemed to be following the same script on this occasion, as my positions were reduced to minimal levels. At this time, I received a call from my friend Harvey (not his real name). Harvey is a practitioner of Elliott Wave analysis (a complex theory that attempts to explain all market behavior as part of a grand structure of price waves).’ Harvey often calls me for my market opinion and in the process can’t resist telling me his. Although I have usually found it to be a mistake to listen to anyone else’s opinions on specific trades, in my experience Harvey had made some very good calls. This time he caught my ear. “Listen, Jack,” he said, “you have to sell the British pound!” At the time, the British pound had gone virtually straight up for four months, moving to a one-and-a-half-year high. “Actually,” I replied, “my own projection suggests that we may be only a few cents away from a major top, but I would never sell into a mnaway market like this. I’m going to wait until there are some signs of the market topping.” “It will never happen,” Harvey shot back. “This is the fifth of a fifth.” (This is a rerference to the wave structure of prices that will mean something to Elliotticians, as enthusiasts of this methodology are known. As for other readers, any attempt at an explanation is more likely to confuse than enlighten-take my word for it.) “This is the market’s last gasp, it will probably just gap lower on Monday morning and never look back.” (This conversation was taking place on a Friday afternoon with the pound near its highs for the week.) “I really feel sure about this one.” I paused, thinking: I’ve just taken a hit in the markets. Harvey is usually pretty good in his analysis, and this time he seems particularly confident about his call. Maybe I’ll coattail him on just this one trade, and if he’s right, it will be an easy way for me to get back on a winning track. So I said (I still cringe at the recollection), “OK Harvey, I’ll follow you on this trade. But I must tell you that from past experience I’ve found listening to other opinions disastrous. If I get in on your opinion, I’ll have no basis for deciding when to get out of the trade. So understand that my plan is to follow you all the way. I’ll get out when you get out, and you need to let me know when you change your opinion.” Harvey readily agreed. I went short at the market about a half-hour before the close and then watched as prices continued to edge higher, with the pound closing near its high for the week. The following Monday morning, the British pound opened 220 points higher. One of my trading rules is: Never hold a position that gaps sharply against you right after you have put it on. (A gap refers to the market opening shaiply higher or lower than the previous close.) The trade seemed wrong. My own instincts were to just get out. However, since I had entered this trade on Harvey’s analysis, I thought it was important to remain consistent. So I called Harvey and said, “This short pound trade doesn’t look so good to me, but since I don’t think it’s a good idea to mix analysis on a trade, my plan is to follow you on the exit of the position. So what do you think?” “It’s gone a little higher than I thought. But this is just a wave extension. I think we’re very close to the top. I’m staying short.” The market continued to edge higher during the week. On Friday, the release of some negative economic news for the pound caused the currency to trade briefly lower during the morning, but by the afternoon prices were up for the day once again. This contrarian response to the news set off warning bells. Again, my instincts were to get out. But I didn’t want to deviate from the game plan at this late juncture, so I called Harvey again. Well, as you might have guessed, the wave was still extending and he was still as bearish as ever. And yes, I stayed short. On the next Monday morning, it was no great surprise that the market was up another few hundred points. A day later, with the market still edging higher, Harvey called. His confidence unshaken, he tri- umphantly announced, “Good news, I’ve redone my analysis and we’re very close to the top.” I groaned to myself. Somehow this enthusiasm over an event that had not yet occurred seemed ominous. My own con- fidence in the trade reached a new low. No need to continue the gruesome details. About one week later, I decided to throw in the towel, Harvey or no Harvey. By the way, the market was still moving higher seven months later. It is amazing how one trading sin led to a cascade of others. It started out with greed in wanting to find an easy way to recoup some losses-by following someone else’s trade. This action also violated my strong belief that it is unwise to be swayed by other people’s opinions in trading. These errors were quickly followed by ignoring some screaming market clues to liquidate the position. Finally, by surrendering the decision process of the trade to another party, I had no method for THE NEW MARKET WIZARDS  risk control. Let me be absolutely clear that the point is not that I followed bad advice and lost money, but rather that the market is a stem enforcer that unmercifully and unfailingly extracts harsh fines for all (trading) transgressions. The fault for the losses was totally my own, not Harvey’s (nor that of the method, Elliott Ware Analysis, which has been wed effectively by many traders). I traded lightly for another month and then decided to call it quits as my account neared the breakeven point. It had been a quick ride up and down, with little to show for it except some market experience. Several months later I was a speaker at a seminar at which Ed Seykota had agreed to make a rare appearance. Ed,was one of the phenomenal futures traders I interviewed for Market Wizards. His views on the markets provide an unusual blend of scientific analysis, psychology, and humor. Ed began his presentation by asking for a volunteer from the audience to point to the time periods on various charts that coincided with the dates of financial magazine covers he had brought along. He started in the early 1980s. The cover blared: “Are Interest Rates Going to 20%?” Sure enough, the date of the magazine cover was in near-perfect synchrony with the bottom of the bond market. At another point, he pulled out a cover with an ominous picture of farm fields withering away under a blazing sun. The publication date coincided with the price peak of the grain markets during the 1988 drought. Moving ahead to then- current times, he showed a magazine cover that read: “How High Can Oil Prices Go?” This story was written at the time of skyrocketing oil prices m the months following the Iraqi invasion of Kuwait. “My guess is that we’ve probably seen the top of the oil market,” said Ed. He was right. “Now you understand how to get all the important information about impending market trends from news and financial magazines. Just read the covers and forget about the articles inside.” Quintessential Ed Seykota. I was eager to speak to Ed so that I could relay my trading experiences and glean the benefits of his insights. Unfortunately, at every break during the seminar, each of us was surrounded by attendees asking questions. We were staying at the same small hotel m San Francisco. After we got back, I asked Ed if he cared to go out and find a spot where we could relax and talk. Although he appeared a bit beat, he agreed. We walked around the area trying to find something that resembled a comfortable local bar THE NEW MARKET WIZARDS  or cafe, but all we managed to find were large hotels. Finally, in desperation we wandered into one. In the lounge, a loud band and a truly bad singer were belting out their version of what else-“New York, New York.” (I’m sure if we were in New York, the band would have been playing “I Left My Heart in San Francisco.”) This certainly would not do for a quiet conversation with the man I hoped would be my temporary mentor. We sat down in the lobby outside, but the strains of the music were still uncomfortably loud (yes, Virginia, there are sounds worse than Muzak), and the atmosphere was deadly. My hopes for an intimate conversation were quickly fading. Trying to make the best of a bad situation, I related my recent trading experiences to Ed. I explained how I started trading again despite my reluctance to do so and the incredible string of errors I committed on the one British pound trade-errors that I thought I had vanquished years ago. I told him that, ironically, at one point before I put on the British pound trade, when I was still up about $20,000, I was in the market for a new car that cost exactly that amount. Since my house had virtually drained me of assets, I was tempted to cash in the account and use the proceeds to buy the car. It was a very appealing thought since the car would have provided an immediate tangible reward for a few months of good trading without even having risked any of my own funds. “So why didn’t you close the account?” Ed asked. “Well,” I said, “how could I?” Although I managed to turn a few thousand dollars into $100,000 on a couple of occasions, I had always stalled out. I had never been able to really break through and extend it into some serious money. If I had decided to cash in my chips to make a purchase, I would always have wondered whether this would have been the time that I would have realized my trading goals. Of course, with the benefit of hindsight, I would have been much better off taking my profits, but at the time I couldn’t see giving up the  THE NEW MARKET WIZARDS opportunity. I rationally explained all mis to Ed. “In other words, the only way you could stop trading was by losing. Is that right?” Ed didn’t have to say anything more. I recalled that in my interview of him for Market Wizards, his most striking comment was: “Everybody gets what they want out of the market.” I had wanted not to be trading, and sure enough that’s what I got. The moral here is: You don’t always have to be in the market. Don’t trade if you don’t feel like it or if trading just doesn’t feel right for whatever reason. To win at the markets you need confidence as well as the desire to trade. I believe the exceptional traders have these two traits most of the time; for the rest of us, they may come together only on an occasional basis. In my own case, I had started out with the confidence but without the desire to trade, and I ended up with THE NEW MARKET WIZARDS  neither. The next time I start trading, I plan to have both.
*The Elliott Wave Principle, as it is formally called, was originally developed by R. N. Elliott, an accountant turned market student, Elliott’s definitive work on the subject was published in 1946, only two years befors his death, under the rather immodest title: Nature’s Law-The Secret of the Universe. The application of the theory is unavoidably subjective, with numerous interpretations appearing in scores of volumes. (SOL-RCE: JohnJ. Murphy, Technical Analysis of the Futures Markets, New York Institute of Finance, 1986.)

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THE NEW MARKET WIZARDS
THE NEW MARKET WIZARDS
Hussein Makes a Bad Trade (THE NEW MARKET WIZARDS )

In many ways, the elements of good and bad decision making in trading are very similar to those that apply to decision making in general. The start of my work on this book coincided with the events immediately preceding the Persian Gulf War. I couldn’t help but be struck by the similarity between Saddam Hussein’s actions (or, more accurately, the lack thereof) and the typical responses of a foundering novice trader. Hussein’s trade was the invasion of Kuwait. Initially, he had solid, fundamental reasons for the trade. (The fundamentatist reasons came later, of course, as Hussein found it convenient to discover religion.) By invading Kuwait, Hussein could drive up oil prices to Iraq’s benefit by eliminating one of the countries that consistently exceeded its OPEC quota and by creating turmoil in the world oil markets. He also stood a perceived good chance of permanently annexing part or all of Kuwait’s oil fields, as well as gaining direct access to the Persian THE NEW MARKET WIZARDS Gulf. And, last but certainly not least, the invasion provided a wonderful opportunity for Hussein to feed his megalomaniacal ambitions. In exchange for all this upside potential, the initial risk on the trade seemed limited. Although forgotten by many because of the eventual decisive stance taken by the United States, the State Department’s initial response to Iraq’s invasion-threatening pronouncements and actions could essentially be paraphrased as “It’s not our problem.” In dealing with Hussein, such an ambivalent policy was almost tantamount to offering to lay out a red carpet for Iraq’s tanks. So initially, from Hussein’s perspective, the invasion of Kuwait was a good trade-large THE NEW MARKET WIZARDS  potential and limited risk. However, as so often happens, the market changed. President Bush committed the United States to the defense of Saudi Arabia by sending in troops and spear-headed the passage of UN resolutions aimed at convincing Hussein to leave Kuwait. At this point, Hussein could probably have negotiated a deal in which he would have withdrawn from Kuwait in exchange for some disputed territorial gains and port rights-a quick profit. However, although the trade had started to deteriorate, Hussein decided to stand pat. Next, Bush sent a stronger signal by doubling U.S. forces to four hundred thousand-an action indicating not only that the United States was ready to defend Saudi Arabia but that it was also establishing the capability for retaking Kuwait by force. Clearly the market had changed. Hussein ignored the market signal and stood back. President Bush then set a January 15 deadline for Iraq’s withdrawal from Kuwait in compliance with the UN resolution-the market moved further against the trade. At this point, the profit potential was probably gone, but Hussein could still have approximated a breakeven trade by offering to withdraw from Kuwait. Once again, he decided to hold the position. Once the January 15 deadline had passed and the United States and its allies in the Gulf War embarked on the massive bombing of Iraq, the original trade was clearly in losing territory. Moreover, the market was moving down sharply every day, as each day’s procrastination resulted in more destruction in Iraq. But how could Hussein give in now when so much had been lost? Much like a bewildered trader caught in a steadily deteriorating position, he pinned his hopes on the long shot: If only he held on long enough, perhaps fear THE NEW MARKET WIZARDS  of casualties would prompt the United States to back down. The trend continued to go against the trade as the United States issued another deadline ultimatum-this time linked to the initiation of a ground war against Iraq. At this juncture, Hussein was readily consenting to conditions contained in the Soviet peace proposal, an agreement that probably would have been perfectly sufficient earlier but was now inadequate. Hussein’s behavior was very much like that of a trader holding a long position in a steadily declining market who says, “I’ll get out when I’m even,” and then, as the situation grows more desperate, “I’ll get out at the last relative high,” with the relative high moving steadily down with the passage of time. Ultimately, with the ground war well under way and his army largely decimated, Hussein finally capitulated. He was like a trader who has held on to a losing position until his account has been virtually destroyed, and then, in complete desperation, finally exclaims to his broker, “Get me out of the market. I don’t care at what price, just get me out!” **//Moral://** **If you can’t take a small loss, sooner or later you will take the mother of all losses.**

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Bill Lipschutz: The Sultan of Currencies (THE NEW MARKET WIZARDS )

Quick, what is the world’s largest financial market? Stocks? No, not even if you aggregate all the world’s equity markets. Of course, it must be bonds. Just think of the huge government debt that has been generated worldwide. Good guess, but wrong again, even if you combine all the world’s fixed-income markets. The correct answer is currencies. In the scope of all financial trading, stocks and bonds are peanuts compared with currencies. It is estimated that, on average, $1 trillion is traded each day in the world currency markets. The vast majority of this currency trading does not take place on any organized exchange but rather is transacted in the interbank currency market. The interbank currency market is a twenty-four-hour market, which literally follows the sun around the world, moving from banking centers of the United States, to Australia, to the Far East, to Europe, and finally back to the United States. The market exists to fill the needs of companies seeking to hedge exchange risk in a world of rapidly fluctuating currency values, but speculators also par- ticipate in the interbank currency market in an effort to profit from their expectations regarding shifts in exchange rates. In this huge market, there THE NEW MARKET WIZARDS  has been only a handful of high-stakes players. Ironically, although these traders sometimes take positions measured in billions of dollars-yes, billions-they are virtually unknown to most of me financial community, let alone the public. Bill Lipschutz is one of these traders. The interviews I held with Lipschutz were conducted in two marathon sessions at his apartment. Lipschutz has market monitor screens everywhere. Of course, there is the large TV monitor in the living room, receiving a feed of currency quotes. There are also quote screens in his office, the kitchen, and near the side of his bed, so that he can roll over in his sleep and check the quotes-as indeed he does regularly (since some of the most active periods in the market occur during the U.S. nighttime hours). In fact, you can’t even take a leak without literally running into a quote screen (there is one conveniently located, somewhat tongue in cheek, at standing height in the bathroom). This fellow obviously takes his trading very seriously. I had first contacted Bill Lipschutz through a public relations agent, Tom Walek. Yes, a public relations agent for a trader sounds rather odd. In fact, this is particularly true for Lipschutz, who had managed quite deliberately to maintain virtually total public anonymity for his entire career despite his huge trades. However, after having spent eight years as Salomon Brothers’ largest and most successful currency trader, Lipschutz had just left the firm to start his own management company to trade currencies (initially as a subsidiary of Merrill Lynch; later, the company evolved into a completely independent venture, Rowayton Capital Management). It was this project that required the public relations support. Anyway, after Walek discussed my interview proposal with Lipschutz, he called to tell me that Bill first wanted an informal meeting so that he could see if it “felt right.” We met at a Soho bar, and after downing several French beers (no joke, the French actually produce some excellent beers) Lipschutz said, “I think you’ll find the story of how, in less than a decade, Salomon Brothers grew from a zero presence in currencies to becoming perhaps the world’s largest player in the currency market an interesting tale.” Besides feeling a sense of relief, since that comment obviously reflected a consent to the interview, his statement certainly whetted my appetite. In our first meeting at his apartment, with my tape recorders whirring, I said, “OK, tell me the story of Salomon’s spectacular growth as a major trading entity in the world currency markets.” I sat back, anticipating a lengthy response full of wonderful anecdotes and insights. Lipschutz answered, “The currency options market, Salomon’s currency options department, and I all started at the same time and grew and prospered simultaneously.” “And …,” I said, prompting him to continue. He rephrased the same response he had just given. “Yes,” I said, “that’s a very interesting coincidence, but could you fill in the details? How about some specific stories?” He responded again with generalizations. My hopes for the interview went into a rapid nosedive. I’ve done interviews that I knew were dead in the water after the first hour and have ended up ditching the results afterwards. However, this interview was different. Although I felt that I was getting very little useful material during the first one or two hours of our conversation, I sensed there was something there. This was not a dry well; I just had to dig deeper. After the first few hours, we started to connect belter and Lipschutz began relating specific stories regarding his trading experiences. These make up the core of the following interview. As mentioned earlier, the large TV screen in Lipschutz’s living room is normally tuned to a currency quote display, with a Reuters news feed mnning across the bottom. Although Lipschutz seemed to be paying full attention to our conversation, on some level he was obviously watching the screen. At one point, the Australian dollar was in the midst of a precipitous decline following some disastrously negative comments made THE NEW MARKET WIZARDS  by the Australian finance minister. Although the market was in a virtual free-fall, Lipschutz felt the sell- off was overdone and interrupted our interview to call in some orders. “Nothing big,” he said. “I’m just trying to buy twenty [$20 million Australian, that is].” Immediately afterward, the Australian dollar started to trade higher and continued to move up throughout the rest of the evening. Lipschutz didn’t get a fill, however, because he had entered his order at a limit | price just a hair below where the market was trading, and the market “- never traded lower. “Missing an opportunity is as bad as being on the wrong side of a trade,” he said. During our second interview, Lipschutz wanted to short the Deutsche mark and was waiting for a small bounce to sell. When noticing that the mark had started to move lower instead, he said, “It looks like I’m going to miss the trade.”

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‘That sounds just like last week when you missed getting long the Australian dollar by using a limit order,” I said. “If you feel that strongly,” I asked, “why don’t you just sell the Deutsche mark at the market?” “What! And pay the bid/ask spread?” Bill exclaimed. I wasn’t sure whether he was serious or joking-or perhaps some combination of the two. (Incidentally, the Deutsche mark kept going lower.) Our interviews were conducted after U.S. market hours, but, since the currency markets never close, Lipschutz, apparently, never stops trading. However, despite his admitted obsession with the markets and trading, Lipschutz appeared very relaxed. I wouldn’t even have known that he was watching the markets had he not occasionally made references to price movements and placed orders over the phone.

THE NEW MARKET WIZARDS
THE NEW MARKET WIZARDS

William Eckhardt: The Mathematician (THE NEW MARKET WIZARDS )

William Eckhardt is one of the key figures in a famous financial tale, yet he is virtually unknown to the public. If elite traders were as familiar as leading individuals in other fields, one could picture Eckhardt appearing in one of those old American Express ads (which featured famous yet obscure names such as Barry Goldwater’s vice presidential running mate): “Do you know me? I was the partner of perhaps the best-known futures speculator of our time, Richard Dennis. I was the one who bet Dennis that trading skill could not be taught. The trading group known in the industry as the Turtles was an outgrowth of an experiment to resolve this wager.” At this point, the name William Eckhardt might be printed across the screen. So who is William Eckhardt? He THE NEW MARKET WIZARDS  is a mathematician who just short of earning his Ph.D. took a detour into trading and never returned to academics (at least not officially). Eckhardt spent his early trading years on the floor. Not surprisingly, he eventually abandoned this reflexive trading arena for the more analytical approach of systems-based trading. For a decade, Eckhardt did very well with his own account, primarily based on the signals generated by the systems he developed but supplemented by his own market judgment. During the past five years, Eckhardt has also pianaged a handful of other accounts, his average return during this period has been 62 percent, ranging from a 7 percent loss in 1989 to a 234 percent gain in 1987. Since 1978, he has averaged better than 60 percent per year in his own trading, with 1989 the only losing year. At the time of our interview, after a career of anonymity, Eckhardt was poised to expand his involvement in managed money to a broader audience. Why was Eckhardt now willing to emerge into the limelight by actively seeking public funds for management? Why not simply continue to trade his own account and those of a few friends and associates, as he had done all along? In an obvious reference to the Turtles [see next chapter], Eckhardt candidly admitted, “I got tired of seeing my students managing hundreds of millions while I was managing comparatively paltry amounts.” Obviously, Eckhardt felt it was time to collect the dues he had earned. Trading system THE NEW MARKET WIZARDS  research is obviously something Eckhardt enjoys, and, of course, it is the way he earns his living, but his true passion may be scientific inquiry. Indeed, in a sense, trading and trading-related research is the means by which Eckhardt generates his own personal grants for the scientific projects that intrigue him. He is drawn to exploring some of the great paradoxes that continue to baffle scientists. Quantum mechanics has captured his interest because of the common-sense-defying Bell’s theorem, which demonstrates that measurements on distantly separated particle systems can determine one another m situations in which no possible influence can pass between the systems. Evolution is another area he studies, trying to find an answer to the riddle of sexual reproduction: Why did nature evolve sexual reproduction, wherein an organism passes on only half of its genes, whereas in asexual reproduction 100 percent of the genes are passed on? Perhaps his most intensive study is directed at understanding the concept of time. When I interviewed Eckhardt, he was working on a book about the nature of time (his basic premise is that the passage of time is an illusion). Eckhardt brings many strengths to the art of trading system design: years of experience as a trader both on and off the floor, an obviously keen analytical mind, and rigorous mathematical training. This combination gives Eckhardt an edge over most other trading system designers.

THE NEW MARKET WIZARDS  Profile:

Author :   JACK D. SCHWAGER

Release date : 1992

Number of pages : 191

 

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