(Sorry, video no longer expands.)
(Sorry, video no longer expands.)
(Sorry, video no longer expands.)
(Note: There are ten questions I ask in this post. Please feel free to submit your answers to some or all of them).
I spend a lot of time thinking about outlier ideas. When I was a kid it was things such as “would I have to board up the second story windows in our house in case of a zombie attack” or “how many blankets would be needed to keep me warm if my family ever moved into an igloo?”
So it’s no wonder that I once came up with an odd but interesting idea while looking at a bag of old foreign coins that my grandparents had given me.
I probably had that bag of coins (which consisted of the leftover change from numerous vacations to Europe and Asia) since I was seven or eight years old. For as long as I could remember I was fixated with the idea that some of that money still had value. However, since I was just a dumb kid I never pursued it any farther and put the bag away in some cabinets at my parent’s house.
A couple of years ago, as I was clearing out those cabinets in preparation for the sale of their house, I came across that mysterious bag again.
My boyhood fantasy of finding value in those coins came rushing back, but it still remained a silly idea.
None of the coins had any numismatic value. None had any silver or gold content. Most were of small denomination and from countries that had devalued their currency a number of times. Even the coins from the continent were worthless since the introduction of the Euro in 2002……
….or were they?
Through what I can only call “nerdly-hyper-focused-minutia-web-searching” I found out something that completely stunned me.
I found out that many of the “obsolete” currencies from European countries were exchangeable for Euros at their respective central banks long after the changeover date, and that some are still exchangeable even today.
As the chart above illustrates, as of today you can still exchange banknotes (paper money) and coins for Euros in Austria, Estonia, Finland, Germany, Ireland, Slovakia, Slovenia, and Spain. Banknotes only can still be exchanged in Cyprus, France, Greece, Luxembourg, Malta, Netherlands, and Portugal. Some countries have end dates for redemption (a few in 2012), but Austria, Ireland, Spain, and Germany’s are indefinite.
Germany, with the world’s fourth largest GDP is the one that got my attention. As I probed further I found out that with a few minor exceptions, German coins and bills from as far back as 1948 were eligible for exchange. You can even exchange Deutschmarks by mail.
This left me with a number of tantalizing questions.
Question #1: How many DM’s could there really be left out there?
According to this chart from the Bundesbank, as of November 30th, 2011 there is a total of 13.31 billion D-marks still in circulation. The exchange rate is pegged at 1.96 DM per Euro, which translates into roughly $8.9 billion dollars USD still floating around out there.
Obviously a portion of that $8.9 billion would have been destroyed or lost over the years by circumstance, so let’s estimate that figure at five percent.
That leaves $8.46 billion USD.
Question #2: How much of it is still in Europe?
My first reaction is to say that a big chunk of it is still in people’s hands in Germany and the surrounding countries since that is where the DM originates.
But by the same token it would seem that those same people would have been the most aggressive in turning their money in when the Euro exchange process began. They would have been the people with the most notice, the most convenience, and the most motivation to turn their DM’s in.
But let’s say that fifty percent of the outstanding and surviving DM’s are in Europe, that still leaves $4.23 billion USD somewhere else
Question #3: How much of that might be in the United States?
Taking Europeans out the mix, The United States is by far been the largest source of tourism to Germany. It has the largest number of citizens with German heritage and it also has the largest foreign military presence in Germany.
That means for sixty years family members, servicemen, and tourists have been traveling to and from Germany, each time bringing back the unspent bits and pieces of that lost $4.23 billion in their wallets, purses, and luggage.
I am willing to say that twenty-five percent of that total is possibly in Asia or South America, leaving $3.23 billion USD in the States.
Question #4: So where exactly are those DM’s in the United States?
And there’s the rub right? Whatever money is here in the US is probably spread about in small amounts, hidden in desk drawers, old coffee cans, or bags like the one my grandparents gave me.
The bag my grandparents gave me had a little over $100.00 USD worth of DM’s in it, which I have to assume is a rather large amount for an individual to have.
(Note: I sold all the DM’s on Ebay. All of the coins were common date, with no collector or precious metal value. With shipping costs the sale totaled about 95% of the then current exchange value. You can find “lots” of common DM’s being sold on Ebay on a regular basis, which usually sell between 90-95% of current USD value. Remember, the DM/Euro rate is fixed, but the Euro still fluctuates against the USD).
This begs the next question.
Question #5: How can you monetize DM’s dispersed in small amounts among millions of people?
There really is no commercial way to monetize all these DM’s from business standpoint. It’s not even an issue of being able to reach the millions of people who might have a few DM’s here and there, because you could set up a web site to do that (which I saw attempted at one time). It’s more an issue of motivation and scale.
Most people can’t be motivated to make even small beneficial changes in their lives let allow to dig through their clutter in order to find DM’s, put them in a package, and mail off only to get a few dollars in return. You just couldn’t get enough volume to make it profitable.
However, I think that charitable organizations could make it work.
Imagine your local church, synagogue, school district, Kiwanis club, or any charitable organization doing a “foreign coins fund-raising drive”. They would ask their members to gather all their old foreign coins and put them in a “drop box”.
The drive could run for a couple of weeks, a month, or even a year. It could be regularly mentioned at the close of every service or in each newsletter. People would be motivated to take part because they would be taking something that LITERALLY had no value to them, and converting it into monetary value for an organization they believe in. It is akin to them taking some dirt from their backyard and having it accepted as a contribution. They might even get a tax deduction.
Volunteers could be easily taught which bills and coins had value and they could be sorted according to type. You probably would not just get DM’s, but Pesetas, Guilders, and other “obsolete” currency as well. Not to mention all the Pounds, Euros, and other “active currencies” that would probably find their way into the drop boxes.
Since all the work would be done by volunteers there would be no monetary cost, just the time of those involved in the process.
In the words of Dana Carvey imitating Johnny Carson, “it’s weird, wild stuff….”, but it’s fun for me to think about.
In conclusion, let me leave you with a few more questions to ponder…….
Question #6: Once you have gathered all the currency, what would be the most cost-effective way to get it exchanged?
Question #7: What do you think the deal is with people buying obsolete DM’s on Ebay?
Question #8: Why do you think these countries are still willing to exchange obsolete currency for Euros?
Question #9: Am I just smoking crack and this concept is full of shit?
Question #10: Does everybody already know this and the “Emperor has no clothes?” (With me being the Emperor….get it?)
I may have a lot of shortcomings, but if you ask my friends and family about me, one thing they will say is that I don’t complain. And the truth is, what do I have to complain about anyway?
I am lucky enough to have been born into a demographic that is the most privileged in all of history; upper middle-class American males. In addition, I belong to the ethnic group that is the least discriminated against in today’s world.
My background is a mixture of Irish, Scottish, Welsh, German, Norwegian, Danish, and Swedish. So basically anything that is white, dorky, and can’t dance.
I am also tall, thin, devastatingly handsome, and extremely humble, so all-in-all I’ve got nothing to complain about.
But just this once, I am going to complain. I am going to complain about my Male Pattern Baldness.
When you are a young man and you start to see more hair going down the drain every day it can really freak you out. I mean let’s face the facts, men want to be attractive for women and the guy with the full head of hair always has the advantage (I’m looking in your direction The_Analyst).
Today I am at peace with it since I am married (no need to look good anymore) and have more important things to worry about than my hair (read: kids).
Now it only annoys me from a logic standpoint. See, I have photos of my dad at his 40th birthday bending over and laughing, where I can see the very top of his head, and it is just a mass of thick hair. No scalp in sight and not an inch of recess on his hairline, so technically I should still have all my hair.
Right now a mass of folliclly challenged men are yelling at their screens…
“….baldness comes from your mother’s side…YOUR MOTHER’S SIDE….OH THE HUMANITY..!!!”
Think again Lex Luthor, because when my grandfather on my mom’s side died at seventy-seven, he still had a full head of hair.
Fortunately I live in a time when this issue could be solved by a simple surgery that would leave me with a head of hair like I had in high school (or so the Bosley Institute infomercial has led me to believe).
The only problem is that I have a hard time throwing away five or ten grand on something I consider pretty narcissistic. I am sure I would look pretty good but it would then be very hard to walk past a homeless woman and her kids no matter how much hair I had.
So if I ever win the lottery, first I will give a big chunk to charity and then immediately go get hair transplant and penis reduction surgery so that my look is finally balanced out.
But back when I was in the depths of my hair depression I began to acquire what is known as The Missing Tile Syndrome, something I first read about in Dennis Prager’s excellent book, “Happiness Is A Serious Problem”.
The Missing Tile Syndrome is based upon the concept that if you go into a room and look up at a ceiling that has a missing tile, that is what your eyes are immediately drawn to. It doesn’t matter how nice and lined up the other tiles are, we instinctively focus on the one that is missing. Sometimes we even obsess about it, wondering “why haven’t they replaced that tile” since we know “everybody must notice it”.
In life this syndrome manifests itself in the form of us focusing on everything that we are lacking. If we are short, we focus on people’s height. If we are fat, we focus on thin people. If poor, we focus on money. The ultimate extension of this is the saying “when a bald man walks into a room the first thing he sees is hair”.
And believe me, I have been right in that same spot.
My best friend is a mixture of Italian and American-Indian and has so much hair it can only be described as “obscene”.
At his father’s 60th birthday party I stood over his dad as he sat at a table blowing out the candles on his cake, and searched in vain for any sight of scalp showing on the top of his head. Screw the party, I wanted to know why he still had every strand of hair he was born with and mine was falling out. Bastard..!!!!!
In trading the syndrome makes you focus on how others can trade successfully in ways you can’t.
I fall victim to this all the time as I watch the trading action on StockTwits.
I watch PeterLBrandt use daily and weekly charts to stay with long-term trades.
I covet the skill with which gtotoy surgically extracts profits from the markets day after day.
I envy the ability of upsidetrader to identify intermediate market turns and exploit the shit out of them.
They all have masses of long flowing hair and I want to have that hair on MY head.
But alas I am bald. I can’t trade the way they do, and it is folly to try.
Instead of agonizing over those missing tiles in my trading ceiling I have to focus on the tiles I do have. I have to continue to develop my trading strengths and minimize my weaknesses. I have to remind myself that being a consistently profitable trader can be achieved in many different ways, and that focusing on the way that works best for you is all that matters.
And for perspective I have to remember that for every time I see somebody with a full head of hair and wish it was mine, there is a short guy who wished he had my height, or an unemployed guy who wished he had my job, or a terminally ill person who wished they had my health, or………..
Last week at my family’s traditional Thanksgiving dinner Uncle Richard was missing from the table. I am sure he would have been there if he could have been but he was dead, having wrapped his car around a light pole earlier this year.
Richard was my father’s younger cousin and even as a little kid I knew he was somewhat of an odd guy, as evidenced by that fact that he actually insisted that people call him “Dick” instead of Richard.
At my high school graduation ceremony he offered me, all of seventeen years old at the time, a celebratory “bump.” Hiiiiii-fuckin-yooo…..!!! Fortunately I always subscribed to the Willie & Lester philosophy of “say ‘nope’ to dope, and ‘ugh’ to drugs” and took a pass.
Back in the 70’s he was married to a later day flower child who although hot in that “I-don’t-shave-my-armpits-but-am-into-free-love” type of way, was a vegetarian extremist. She would always show up at holiday dinners with “nut roll”, and make her kids eat it instead of turkey or ham, or even stuffing if God forbid there was any sausage in it.
Despite his quirkiness, to an outsider his life had pretty much played out by the book. Star football player in high school, into the military for a couple of years, college degree, and then a steady job with a solid East Coast company.
Later in life his mother had left him a good inheritance, so financially he was set. He was re-married, had two grown kids, and a couple of grandchildren. His life was “dialed in”.
But a closer examination revealed a guy who had demons to fight. There was a reckless streak to him that constantly put at risk all the things he had worked so hard for in his life.
The pattern was always the same. His life would go for years at a time without incident and then out of the blue he’d inject a massive dose of bad judgment into it and nearly go off the rails.
Once after a night of partying with his friends he pulled his BMW over by the side of the road to “take a rest.” Two weeks later he awoke from his coma.
His car had gone up in flames so completely that it melted all four tires to the ground. He suffered burns over a good portion of his body, only minimized by the fact that the owner of the house which he parked his car in front of saw the flames and doused him with his garden hose as he was rolling on the ground with his clothes on fire.
His story was that he had lit up a cigar and then dropped it on the floor mat, which started the fire. However the police report made mention of an “accelerant” of some kind and there was speculation, in hushed tones of course, that it was actually some sort of botched Viking style funeral pyre attempt.
I didn’t know why he did the things he did and to tell the truth, I didn’t really care. I know that may seem callous but it’s the truth. He was twenty-five years my senior and a “holiday relative” at best, whom I saw maybe once a year. When I did see him our entire conversation would go like this….
“Hey buddy…how are you doing?
“Pretty good, what have you been up to?”
“Oh you know, the usual, how about you?”
“Same old, same old.”
“Yeah, I can relate. I am going to grab a drink, let’s catch up later……”
Of course we never would catch up later because we didn’t care enough about each other to do so.
The party line in the family is that he lost control of his Porsche around a tight turn, but the real story is that after leaving his favorite watering hole he decided to race a guy in a Ferrari. It is up for debate as to whether these incidents throughout his life were really covert suicide attempts or not, but this last bad decision achieved the same result no matter what the intent.
Despite my ambivalence about Uncle Dick, watching his antics from a far during my formative years taught me a couple of very important rules for life in general and they have always served me well, but it took me a long time to realize that they all also translate perfectly into trading.
Rule #1: There is no amount of good work that can’t be undone by one bad decision.
You’ve had a good day trading? A good week? A good quarter? Maybe even a good year trading….doesn’t matter, one bad decision and you can give it all back.
Rule #2: There is an inverse relationship between the amount of time and work needed in order to create and the amount needed to destroy.
Do you spend hours and hours each day looking at charts, talking with traders, running scans, reading all the SEC documents you can get your hands on just to get an edge in your trading? One split second “gut” trade and it is all for naught.
Rule #3: Sometimes your worst decision will be your last decision.
If you make a decision that is bad enough in trading such as ignoring your stops, adding to a losing trade, or over-leveraging your account, not unlike my uncle, it won’t matter what your real intent is, the outcome will be a “suicide trade.”
Trading in the abstract can be about many things; control, ego, risk, stimulation, “mommy issues”, etc., but at the end of the day, your success at it is measured by dollars. If you have more of them when you finish than you had when you started, you are a success. The rub is that as long as you are still trading, you are never finished, and all three rules remain in play.
This last rule of course is the most critical one. Over the years (in trading) I have violated Rules #1 and #2 on numerous occasions. I have experienced seeing my hard work/profits go away in one stupid, almost instantaneous decision, and then swear that I will never do it again, but I have never violated Rule #3.
I know it is out there though, waiting for me like one of those yellow barrels in “Jaws”. Circling around, sometimes going under to pretend it’s no longer a threat, but always stalking me, waiting for that one momentary lapse of discipline and judgment to jump on me when my back is turned.
Chris Rock once said that when he had his first daughter he instantaneously knew that from that moment on he only had one purpose in life. Not to make money. Not to be a success. Not to win an Academy Award, but to keep her off the pole at any cost. If you are a trader it’s the same thing, your one purpose in your trading it to avoid the suicide trade at any cost.
Maybe you think that it is insensitive and superficial to compare the actual loss of life to blowing up a trading account? Well I am not talking about a 22-year-old college student blowing up his 5K account at Charles Schwab. I can name five people I personally know that were well into their 40’s and blew up their accounts up and lost major parts of their lives like their spouses, their children, or their homes, and are now suffocating under a mountain of debt (credit card cash advances can fund a trading account. Hiyoooo…!). One of them lost ALL OF THOSE THINGS in a three-month period.
And if you throw in the “Madoff’s” of the world, it’s easy to see that the damage the suicide trade can cause can be as bad as the actual loss of life.
By the way, as ambivalent as I may have been about my uncle, I am not a complete A-hole and would never cause unnecessary suffering to his widow or children. None of them have the remotest idea that I write a blog, let alone read it (but Bernie’s wife does, so “fuck you Ruth!”).
Back in 1986 Eddie Murphy was the hottest standup comic around and a group of friends and I decided to go see him live. There was a palpable buzz going through the crowd that night that built into a climax as the house lights went down and Eddie burst out into the spotlight, leather suit and all. He was full of energy, pacing back and forth along the edge of the stage like a stalking tiger, and then diving headfirst into his routine….
Hello Orange County, how is everybody doing tonight? (Wild applause). Hey I’m sorry I was late getting out here, but I was watching a porno backstage. It was wild, there was this guy sucking his own dick. I mean is that crazy or what? Man if I could do that I would never leave the house. People would be walking down the street saying “Hey, what ever happened to that Eddie Murphy guy?”
My friends and I roared with laughter but then just as quickly, being the insecure teenage boys we were, cautiously measured each other’s reaction to be sure that laughing at an auto-fellatio joke didn’t make us “gay.”
The guy that Eddie referenced in his story was none other than the legendary “Hedgehog” himself, Ron Jeremy. Ladies if you don’t know who he is, Google him, and guys if you don’t know who he is….well then you are just lying.
I was reminded of this incident while walking through the exhibit hall at the Trader’s Expo in Las Vegas.
The Trader’s Expo is a convention where companies that are part of the “business of trading” display their products and services to thousands of eager retail traders. For the most part I have no problem with these companies and what they do. They include;
Brokerages: Until the time when retail traders can trade directly on the exchange’s servers (read: never) these are a necessary evil.
Data Vendors: Where would we be if we could not create charts and scans in order to find our next trade candidates?
Educational Courses: Not as bad as you might think, and can actually be helpful if they focus on a risk oriented methodology.
Mentor Programs: This is where it gets a bit douchey for me, but I can’t totally blow them off as I know traders who have benefited from them greatly.
Trading Services: Nothing wrong with experienced traders running a service to give subscribers market insight and highlight potential trade setups. I use a few of them myself.
Speakers and Authors: As long as they themselves trade or have extensive experience trading then their presentations/books can be a wealth of good info.
No, the thing I have a fucking problem with are the companies and individuals that try to sell trading “systems”. These snake oil salesmen have been around since the first exchange opened, tying to lure in new and unsuspecting traders with their promise of a “sure thing”, and were actually prophesized by Nostradamus in one of his lesser know quatrains;
From the Great Lucifer a false key to the merchant’s game shall come to be known
A “sistema” that consumes much gold & silver yet from which none ever emerges
Laying waste to the flocks of sheep who come to feed at its teat
And the red birds from a saint town shall take the ten plus one series in seven
Well I am here, as a consequence of the “donkey” incident, to fulfill my court-ordered community service obligation and warn you to never buy one of these systems, as they are all complete bullshit.
So how do you know if someone is trying to peddle you a system? Sometimes it as easy as looking at the person doing the selling, as the clip below illustrates.
Oh, karate kicks & saying “Kachingo” is how to make money in the market
Other times the venue in which it is being sold can give you a clue. Legitimate companies advertise in media that is focused towards traders, so if you are up late one night watching reruns of The Golden Girls, and you see an ad telling you how you can “trade for a living”, you should probably drop the credit card and back away from your computer.
But perhaps the best indicator is if the product being sold professes to take all the discretion out of the trading process, automatically telling you where to buy and where to sell (implicitly making a profit in the process).
Hundreds of millions of dollars are spent by the likes of Goldman Sachs to develop algo, HFT, and quant trading systems, and they are constantly being modified as the conditions in the markets change. The code in these systems is highly guarded and there have even been court battles when programmers have left one firm to go to another, as to what information they are allowed to disclose.
What this all boils down to is that as a retail trader, you will NEVER have the ability to purchase a viable trading system. The costs to make one are too high, the need to modify it too intense, but more so than that, it is a self-fulfilling prophecy that goes back to the Eddie Murphy bit.
If you really had a trading system that automatically made you money, would you share the secret with the world by selling it, or would you just sit in a room all day long, doing the “Ron Jeremy”, and auto-pleasuring yourself in the form of coining money?
Take my advice and use the “IKEA rule” when considering any trading related product purchases. The IKEA rule is based upon the 75/25 ratio, meaning 25% of the stuff they sell is decent quality, you just have to get through the 75% of the stuff they sell that is crap in order to find it.
Look for the products that are “tools” for successful trading and then use them to create a methodology that fits your style and personality. It is not as easy as just buying a system, but it will serve you better and improve your chances of being a successful trader in the long run.
Recently someone wrote this comment on my blog…
“….how can you even write about trading, since you admit that you blew up on a trade. You’re not a real trader, you’re a douchebag!”
A couple things came to mind when I read this. First off, I resent being called a douchebag. I am really more of an asshole than a douchebag. Secondly, doesn’t my grandmother have better things to do with her time?
The question of what a “real trader” is and if I deserve that title is probably a blog post of its own, but it did get me to thinking about what it means to do a “trade”.
The mechanics of a trade involve the buying and selling of a commodity, but the process of making a trade is a much broader concept, one that transcends the markets. I don’t mean this in some mystical, shamanic, Val Kilmer in Thunderheart type of way, but in the way in which for traders, the decision-making process in the markets mirrors that of life. The way we weigh risk and reward, time our entries and exits, battle our fear, our greed, our ego, and ultimately live with the consequences be they good or bad.
With that in mind I have five “trades” that standout in my life.
1. “The Perfect Entry”
My father worked for one company, Campbell Soup, for over 20 years. If my mother had her way, after high school I would have gone to a good but reasonably priced four-year college, then just as I was being handed my diploma a pneumatic tube would have sucked me up and inserted me directly into a cubicle at a Fortune 500 company. My closet would have been stocked with an anti-Jobs wardrobe of blue suits, white shirts, and black wing tips. In at nine, out at five, lather, rinse, repeat for 40 years until a gold watch was hucked at me as I was shown the door.
The post high school graduation period is critical in a young man’s life. There is a lot of pressure to enter into a choice that will often determine the direction of the rest of your life, and I was feeling that pressure in spades. Worse yet it felt as if the window to make that decision was closing.
I knew in my bones that college was not for me, so instead I took a side job that I had after school and made it into a full-time business. This entry into entrepreneurship allowed me to be my own boss and rise or fall on my own merits, instead of punching a clock and kissing ass to try to rise up the corporate ladder.
2. “Cutting My Losses”
My first serious relationship was with a beautiful Peruvian girl named Maria whom I fell head over heals for. It was a passionate and volatile relationship that is often common with young lovers. My first hint that there might be problems going forward came up one night when were out having dinner at a Mexican restaurant.
After the waitress took our order and left the table Maria said to me, “I can’t believe the way you were looking at her.” “What are you talking about,” I said, honestly puzzled. “Oh my God you looked at her like you wanted to jump all over her”. Being the sarcastic asshole I was (okay, I am), I looked her straight in the eyes and said, “yeah, in fact when you go to the restroom I am going to ask her for a date.” Fortunately I have good reflexes and the salsa bowl hit the wall behind me.
I loved her as much as I could have loved someone at that time and early on I thought there was a future for us. But if Kim Kardashian has taught us anything, it is that love can take unexpected turns and often goes bad.
A year into our relationship I found myself going to weekly counseling sessions to try and work through the myriad of issues that made us incompatible. Then one night as we were waiting to go into our session it hit me harder than when Spade cracked Farley with that 2×4 in Tommy Boy….
“If we are only dating and are already in counselling, where the fuck is this relationship going to go from here?”
I hit the eject button right there, joined my friends at a local bar, and “got it in” as fast as I could. Unfortunately the brewzooka wasn’t yet invented.
3. “Rolling A Position Forward”
I had one mantra that I repeated to every girl I went out with, “I am never getting married, but if I do, I am NEVER having kids.” Boy what a catch I must have seemed like huh?
After dating my current wife for almost six years, our relationship was getting to the point where it was time to “fish or cut bait”. She comes from a large Catholic family and having children was a concept embedded deep in her DNA. Of course that didn’t faze me and I figured I would just lay it on the line; the wonderful me or kids. I was making her an offer she couldn’t refuse.
I conferred with a good friend of mine just to make sure I had my position down pat. I had her pretend she was my future wife, throwing everything she could at me to try to change my mind, but I held fast.
I decided to have “the talk” at an international food court near my office. It was my favored spot to break bad news to my girlfriends as it was crowded with office workers during lunch making the likelihood of an ugly scene less likely, and the Italian joint had a great calzone.
We sat down and I told her straight out that I loved her and wanted to marry her, but under no circumstances would I be having children. She didn’t bat an eye and simply responded to me in a calm straightforward way and said, “Well, then I guess this is the end for us, because I want to have kids.”
Staring right back at her, and having prepared for this moment I said, “Well babe, if that’s the case…..then……well, uh……I guess I am okay with having kids too.”
I am not a religious guy but every night just to be sure I say a prayer to God, Jesus, Mohammed, Buddha, Jimmy Page, Shiva, Vishnu, Mark Zukerberg/Satan, and that guy who keeps predicting the Armageddon, and thank them for letting me put my ego aside, allowing me to move my position from a losing one to a winning one.
Eerily similar to how fast I folded.
4. “Learning Not To Chase”
In Southern California where I grew up, when a baby is born they give it a bottle and a subscription to the local MLS service. For as long as I could remember it was a simple concept, all you had to do was buy a house and it went up in value.
I watched as prices got to new highs in 2002 and continued to steadily move up over the next two years. By 2004 the home buying mania was in full swing and my wife and I considered taking the plunge, but we could not agree on what we wanted and decided to “wait.” By the time I sold my business in 2005 you literally could not turn around without someone you know buying a new house. I went to cocktail parties where people would talk about the five or six properties that they were in the process of flipping.
The pressure to buy a house was incredible and having a decent slug of cash in the bank I was tempted. My wife wanted a place of our own to raise a family, my friends homes were increasing in value by 3% to 5% monthly, and everybody was getting rich in the real estate market. I decided to do it.
I checked the interest rates and talked to my friend who owned a mortgage broker and was assured that I would have no problem qualifying for the house of my dreams. Before going down to his office to start the paperwork, I was driving through a nearby housing track, trying to keep my eyes on the pulse of the now parabolic market when I came across a newly listed property.
I pulled the car over and grabbed one of the spec sheets hanging from the yard sign. It was a 40 year-old house with five bedrooms, 2500 hundred square feet, in a decent but not particularly remarkable neighborhood. The listing price was $1,495,000!
I knew at that moment that the market had gotten away from me and I cancelled my appointment. The next year was even harder to stand by and watch as price went to never before imagined heights, but in the end my discipline in not chasing kept me from a financial catastrophe that so many others did not avoid. I am still renting.
5. “The Perfect Exit”
After twenty years, the business that had given me that initial inspiration and defined me for so long had become my personal hell on earth. I could no longer deal with employees, customers, and sixteen hour, six-day weeks. More than that I had long ago realized that there was nothing even remotely related to my business that I was passionate about. The money was good and I could have continued on in my semi-catatonic state for five or maybe ten more years, but I knew it would be no good for me or the people around me.
My wife and I were talking about having kids, a thought which terrified me, not because of my long ago discarded “no kid policy”, but because it left me with two equally scary choices. Leave the only real job I had ever known, and take the financial risk that went with that decision, or be an absentee parent who when I did show up was tired, irritable, and not ever really “there.” Something had to give.
I remember the day I made the decision to sell my company like it was yesterday. Unannounced an inspector from the Southern California Air Quality Management District walked into my office. He informed me that some of the air quality readings in the area showed high levels of metallic substances. He was spot checking businesses and mine was in his sights. Apparently it did not matter to him that we warehoused furniture, art, and accessories for interior design firms.
As I walked him through our warehouse showing him all the furniture, art, and accessories, he kept asking increasingly more annoying questions. Did we use any metallic substances? Did we have any open flames? Was there any high-powered industrial machinery in use?
“Jesus fucking Christ, we store furniture, and art, and accessories you idiot, how many times do I have to say it”, I said to myself. Then a thought came to me. I asked him to walk out to the front of my building with me.
Our building was at the end of a short cul-de-sac, not even then length of a football field. I looked at him, pointed to the beginning of the street, and asked him, “have you checked out the foundry down there on the corner. You know, the one with flat beds full of aluminum being fed into the furnaces that runs 24/7?” When he responded that he hadn’t, I literally pushed him into the street. I went in to my office and called a broker whom had cold called me six months earlier and one year later my business was sold.
Life happens in real-time and I have always approached it with that trader’s spirit, even if I wasn’t consciously aware of it at all times. I’ve had some good outcomes and some bad ones. These were five of the good ones.
Back in the 90’s, when internet stocks were going berserk, I had a friend who was just out of law school and had decided to dabble in the markets. He had a small account, and he decided to put it all into AOL (America Online). As he started making the rounds to interview for a job, he noticed that his stock was taking off, moving up almost every day.
His account started to grow, and he bought more and more AOL. His account value hit $250,000, then $500,000, and then $750,000. It seemed as if he could do no wrong with AOL, and he had stopped interviewing with law firms, and decided that he was just going to live off the profits in his trading account.
His account continued to climb higher, and one day I asked him when he was going to take his profits, to which he replied, “When it hits one million dollars, I am going to close it out, and travel the world.” This was a young man in his mid-twenties and one million dollars was a ton of money to him. His account value finally hit a high of $970,000 just before the long running internet bubble began to burst.
After the first substantial decline, he told me that if it just got back to $750,000 he would sell it. Well you know the rest of the story. He repeated that mantra with $600,000 and $500,000 and $400,000 and so on. He took his position all the way back down to below his original account value, and thus began knocking on doors of law firms to try to get the job he never thought he would have to get.
The takeaway from this harrowing tale is that when setting stops and targets for trading, they have to be chart based, and not money based. The market has no idea that you exist, and thus its movements have no relation to how much you are up or down on your position.
The movements of the market are related to areas where there is support and where there is resistance; that are based upon the number of buyers and sellers in those areas. So if your $ target on your position puts the price above resistance, you many never get that price, thus not locking in your profits. Likewise, if your $ stop is above support, you make get taken out, just before price turns and rallies.
The key to converting from $ based stops or targets to chart based ones is to start by “reverse” sizing your position. This takes away the emotional aspect of the trade, and allows you to trade better, and off of what is happening in the market, instead of what is happening in your head. Check this post for more info on reverse position sizing.
We’re fascinated with billionaires. They make the headlines every day. Forbes devotes an annual list that celebrates them and Bloomberg tracks their wealth in real-time.
Well, I have a confession to make. I am not a billionaire.
Truth be told, I don’t even have 100 million dollars. But for some reason, I always seem to be hanging with billionaires.
One day, when I was standing in front of a restaurant, waiting to meet my friend for lunch, I looked next to me and one appeared. Billionaires are sneaky like that. It was George Argyos, former ambassador to Spain.
Contrary to popular belief, billionaires do not levitate nor do they give off an eerie Jesus-like glow, in fact they often look pretty normal. George actually looks a lot like my high school Algebra teacher Mr. Ross, but with a better suit.
I thought about approaching him to say hello, but just like in my 20’s when I wanted to strike up a conversation with a beautiful girl, I couldn’t think of a good opening line.
I contemplated saying “Hello, Ambassador Argyos, my name is Brian Lund and I’m a big fan of your work on implementing the treaty of Talacaloco,” but it just seemed too forced. Instead, I stood there in awkward silence for a few minutes until my friend arrived.
When we went inside to eat, as fate would have it, George sat at the table next to us. I gave him that knowing nod that only two people with a shared history can understand, but he pretended not to see me. I am pretty sure he was eating a ham sandwich. Possibly with mustard.
George is a nice guy but I probably won’t hang out with him again. He is a little boring, and besides, he’s only worth $2 billion.
John Arnold, the former Enron trader, and wunderkind oil trader, is the youngest billionaire I have chilled with.
We were at a club in Houston, and I was with my brother-in-law and his friends, all former Enron traders as well. John was in the VIP section, but had a round of drinks sent over to our table.
Later, when I was waiting in line for the restroom, he and his posse’ passed by me on the way to the exit. I was a bit lit up at that point and yelled, “Johnny Baaaaby! The Grey Goose was the BOMB! You the MAN!” In retrospect, I probably should have asked where he thought natty gas was heading.
Some of the billionaires I have hung out with are more interesting than others.
Henri Samueli and Henry Nicholas are the co-founders of Broadcom, and when I hung with them they were each worth a cool 10 billion. I owned a company that coordinated projects for interior designers, and we were hired by the firms working on each of their respective homes.
I was at Samueli’s house one day, standing on his driveway working on a quote when he drove right past me into his garage. I waved to him, and I am pretty sure he waved back, although his windows were tinted so I am not quite sure.
Nicholas and I used to chat a lot. I remember on one particularly hot summer day, I was walking his house with his designer, when he emerged from his workout room. He had a couple of bottles of water in his hand. “Would you like one”, he asked as he walked past me towards the front door. “No thanks”, I said. “Okay, suit yourself”. He was always saying crazy things like that.
Even though they were partners at the same company, Henri and Henry had slightly different personalities. For example, Samueli built a multi-lot, modern style house right on the water, whereas Nicholas erected a massive Tudor style home high on a hill with a sex dungeon under it. Samueli used to host parties where the captains of industry would get together and raise money for charity. Nicolas used to host orgies where he furnished strippers and prostitutes for guests. Samueli bought the Anaheim Ducks and Nicholas bought a warehouse and filled it with cocaine and ecstasy. Neither one of them ever invited me to one of their parties, but my guess is that the ones at Nicholas’ house were more fun.
Donald Bren is probably one of the wealthiest billionaires nobody outside of Southern California has heard of. He made his money in real estate, and could buy and sell Donald Trump four times over. We met at Bloomindales’s one day about 10 years ago, when we were both in the women’s section, where I was looking for a scarf for my mother’s birthday.
Donny (as I like to call him), was being waited on at the counter by a sales associate, while his assistants busily conducted business on their cell phones. I was standing behind him, and noticed that he was purchasing a very nice lady’s handbag, probably for his wife. When the sales associate took it away to wrap it, and there was a pause in the action, I leaned over and said, “Nice choice”. He was about to engage me in conversation, but his associates were jealous and formed a semi-circle between him and me. No big deal. I didn’t really like the handbag anyway.
Billionaires fascinate me and when I was younger I assumed that eventually I would become one. I was told from an early age that I was “very intelligent”, and in my young mind that and time seemed like a sure recipe for landing on the cover of Forbes. However as I got older I started to realize that I was often doing things that probably were not conducive to becoming a billionaire.
When I was twenty-one I spent a whole week during Christmas break sitting on my couch, drinking beer, and playing Super Mario Bros with my roommates. Chances are not many billionaires have done that.
Other times when I was closing down a bar with friends on a Thursday night, I would wonder if any billionaires out there were doing the same thing as me at that moment. I doubt it.
Sleeping in on the weekends is something I used to loved to do, but as I would lay there wrapped underneath my comforter, it would dawn on me that billionaires were already hard at work.
As time went on it became clear to me that I did not have what it took to be a billionaire. I resigned myself to that fact, and proceeded to get on with my life. For many years I didn’t think about billionaires or what their lives were like. I settled down, got married, and started having children. And then something funny happened. I began to think about them again.
When there was thunder and lightning outside and my frightened kids jumped in bed with my wife and me, I thought about being a billionaire. If I was a billionaire would I have been there to experience that moment with them?
How many times would I have been on my private plane in route to a high-powered negotiation or in five-star hotel suite far away, getting ready for an early morning board meeting while a school play was going on?
That lazy summer vacation spent with the family driving up the coast to see the redwoods and camping out under that stars…would I have been there for that?
Those are the things that are important to me, and although I am not a billionaire, I like my life because I have the life that fits who I am.
Life has its own filtering process, and often we spend the majority of our time fighting that process, trying to be something we are not. Chasing some illusion of who we are or what we should be, instead of starting the process of becoming who we are meant to be.
Let me be clear, I am not talking about “settling” or giving up on your dreams, but about exploring and discovering what and who is important in your life, and then creating a life that puts it/them at the center.
Looking in on a billionaire’s life we imagine what it would be like to have that wealth and project the life we currently have on top of it. We rationalize killing ourselves so we can “make it”, and once we do we think then we will focus on more important things. But that is an oxymoron that rarely exists in the real world. Very few people have the single-minded, unrelenting, laser focused drive that it takes to become a billionaire, and then just “turn it off”.
Perhaps it is best summed up in the by the follow story;
A reporter goes down to the floor of the exchange to interview a very successful trader. He says, “I don’t get it? You have been doing this for 20 years and you are worth 100 million dollars. Yet every day, you get up at 4:30am, take the train into the city, fight among the traders in the pit, stay late to examine charts, and take the last train out of the city at night to go home. If I was worth 100 million dollars, I would be retired, sitting on a beach somewhere, enjoying my life.” The trader pauses, looks straight at the reporter and says, “That’s why you’ll never be worth a 100 million dollars.”
So perhaps I will never be a billionaire, or even a hundred millionaire, and that’s okay. I have family and friends that I love. I have my health, and I love what I do, and you can’t put a price on that.
What is R?
Any sound trading methodology has to incorporate risk management, and one of the easiest ways to do that is to use the “R” method.
“R” is a fixed dollar amount that stands for both risk and reward, and is best arrived at by using a percentage of your total trading capital. It allows you to size your position in relation to your risk level instead of in an arbitrary way.
For example, if you have $50,000 available in trading capital (cash not including margin), you might use one-quarter of one percent (.0025), or $125.00, as your “R” factor. This is the total amount you are willing to risk per trade and is expressed as 1R.
In the example below, A is a former support level that was broken and now is a potential resistance level. Price has been trapped between B and C level, and you are looking to go long if it breaks back above B. You know that a reasonable stop loss would be just below level C, so you determine the price distance between your entry just above B and your stop just below C.
Let’s say that this distance is 50 cents. You now take that distance and divide it by your “R” factor, which gives you a position size of 250 shares ($125.00 / .50 = 250).
You now know that if your trade fails and hits your stop-loss, the most you can lose is $125.00 or 1R. The goal then becomes to only take trades where you have the best potential reward for your 1R risk, ideally 1:3.
In this same example, the resistance level of A is a reasonable target for a successful trade, so you determine the distance between your entry just above B, to the target of A. You then divide this number by your “R” factor to see if the trade is worth taking.
If the distance between A and B is $1.50 then you have a 1:3 risk/reward ratio and the trade is a good bet ($1.50 / .50 = 3).
The higher the risk/reward ratio you have on your trades, the fewer times you have to be right to still make money, as the chart below illustrates.
|Risk||Reward||# of Trades||50% WT||40% WT||30% WT||20% WT|
|WT =Winning Trades|
You can see that if you only take trades that have a 1:3 risk/reward ratio, and you are correct just 50% of the time, you will have a 10R profit on ten trades.
Understanding how to use risk/return and position sizing allows you to make sure you are never over extended on a trade and allows you to always return to fight another day.
Because I’ve been involved in the market for so long, people often ask me about my trading style and how I feel about the market in general. Occasionally, they will tell me about their own forays into trading and some will even say something like this…
“I have been paper trading for about six months now, and I am killing it! I’m thinking about quitting my job and starting to trade full-time. By the way, where is the local Ferrari dealership?”
Since I like to see people in terrible pain and suffering, I always encourage them to go for it! (Jk).
I am not a fan of paper trading because since you are not using real money, it gives you an artificial sense of detachment from your trades, both wins and losses.
Almost every person out there will change their paper trading methodology once they experience the euphoria of a winning trade or the depression of a losing one.
Sometimes I will find a person with a very rules-based background (think engineers, airline pilots, etc) who will actually trade real money the same way that they paper trade, but for vast majority of people, they just can’t.
I have a lot of issues with Alexander Elder, as well as any author whom I suspect makes more money from writing books about trading than actually trading. That being said, I remember reading his book, “Trading For a Living” and thinking that he spent too much time on the psychology of trading.
Being young and foolish, I also remember thinking, “what the hell does all this crap have to do with trading? You buy a stock, if it goes up, you make money, and if it goes down, you lose.”
Needless to say, the point of that book was to try to save the novice trader from blowing their account out before they really began to understand how emotions, mindset, and pre-conceived perceptions about the market can affect their trading success. Those who paper trade can never understand that.
It’s like trying to understand what sugar tastes like without actually tasting it. You can read about it, you can talk to friends about it, you can study its molecular structure, but until you actually take some and put it on your tongue, you can never know what it really is all about.
So to those would-be traders, I suggest a better alternative, which is to trade with a very small amount of money. Even if you are only risking $50 or $100 dollars on a trade I believe it will tell you more about your ability to trade than any amount of paper trading will.
It will give you “skin in the game” and focus your trading. It will also give you time to build a methodology, which if proven sound over time, can be scaled up as your trading experience and account equity grow.