Martin Kronicle

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A reader asked to interview me about 6 months ago. I didn’t see the benefit at the time, but I get enough questions that I thought I might give it a go. The interviewer is a reader of MartinKronicle and he did a great job for someone with no experience. His name is Gavin Murphy – an Irishman – living in London and we recorded the call via Skype.

In the interview I answered a lot of great questions that I think emerging CTAs and aspiring Prop Traders can benefit from. I hope that I’ve taken on and dispelled enough of the conventional wisdom and what I believe to be misbeliefs in developing your career and how to learn about trading.

Among the topics are the misconceptions of the benefits of trading a system versus specializing in one commodity, what indicators are overrated, another way to consider the ATR, and how to employ the Grúdlann Gheata Shan Séamuis emotional stop-loss system.

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Mike Bellafiore and Steve Spencer are the founders of SMB Trading. Bella and Spencer, along with their colleagues Adam, Roy, ZMush (Z$, Mush, Mushy, Z), JThoma, GMan, are prop traders and have one of the best training programs in the country.

I spoke with Mike about his new book One Good Trade: Inside the Highly Competitive World of Proprietary Trading (Wiley Trading), and his training program.

They also maintain a blog at SMB Training that I recommend.

You can follow SMB Capital on Twitter.

Chris Gillick, a current friend and former colleague of mine at Trader Monthly, helped Bella write this book. Gillick also wrote an article on SMB for the October 2008 edition of the magazine called Three Rules: Motion Detectors which can be found under the Press tab on their blog.

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“Truths are first clouds; then rain, then harvest and food.” — Henry Ward Beecher

For the most part, I trade exchange-listed commodities, but there are dozens of commodities that don’t trade as such. The most important one of them is water. The growing 21st century “water gap” between supply and demand is going to have major ramifications for the entire planet.

There is the potential for the world to go from abundance to scarcity within 25 years. What does the world look like in 2050 when there are an estimated 9 billion people inhabiting the earth and they all want healthy food, hot showers, running water in their homes, and effective sewage? Will we create a “water footprint” and trade water conservation credits, not unlike the carbon market?

Water as Political Capital

On one hand we need large urban centers to begin aggressively conserving water, while on the other hand there are hundreds of millions of people in India and China who do not have running water. This is a global issue that’s not making enough headlines — and it needs to.

Colin Chartres is the co-author of Out of Water: From Abundance to Scarcity and How to Solve the World’s Water Problems and is the Director General of the International Water Management Institute (IWMI).

Colin’s book, co-written with Sam Varma, blew me away — as did this interview. I highly recommend the book.

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I wouldn’t want to be a CEO of an oil firm if my life depended on it. Everyone hates you. You have to deal with some of the most unsavory people in the world who steal, bribe, reneg, and lie to you all-the-while demanding signature bonuses. You at times put your own life at risk via your business travels. You have to have an appeasing Green ethos.

Back home in America, you have to deal with your own brethren who spit in your face, but at the same time want $2 a gallon gasoline consistently, as if it’s their birthright. That’s all before you have to deal with a lame President, House, and Senate who collectively could not come up with a National Energy Policy if their offices depended on it.

[As of this writing, the Department of Energy has not found America a single drop of oil. Alec Baldwin wants to shut down an oil company. Let's put the DOE down first Alec - I'll work with you on it.]

Tom Bower’s new book Oil: Money, Politics, and Power in the 21st Century is the best book on crude oil that I’ve ever read. Crude oil is a very complicated business. It is about 180 degrees out of phase with the simplicity of e-commerce.

Bower spoke with more than 250 industry professionals, politicians, and analysts over an 18 month period of time in order to complete this book. IMHO, I think academics and Liberals will learn the most from this book. It is written as the definitive history of crude oil – and it’s backed up by facts. Not make believe facts or Michael Moore Facts either, but real facts, that in the end provide readers with a well-rounded understanding of America’s addiction to crude oil and how we got here.

Read the rest of Big Oil Has Replaced Big Tobacco In The Bulls Eye of America’s Vitriol at the Huffington Post.

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Here’s the scene. You’re in the interior of a large, and loud institutional brokerage firm. It’s utter mayhem and organized chaos, with paper flying and Institutional salespeople shouting over one another and at each other. One of the Administrative Assistants picks up a call and shouts…

“Call for you Buddy. Pickup line 2…”
“Bud Fox,” the young man says matter-of-factly, but hopeful.
“OK Bud Fox, I want you to buy 20,000 Bluestar at 15 1/8 – 3/8 tops,” the man says spinning in his chair, coming face-to-face with the audience. “Think you can handle that?”
“Yes sir Mr. Gekko, you won’t regret this!”

And with that Buy order for Bluestar, Bud Fox sold his integrity to Gordon Gekko and with it any hope he’d have for a solid career – all for a measly ticket into the arena of 10-figure clients. He had great parents and a solid upbringing. So how can something like this happen?

Somewhere in the late 80s there was a young man from the outer boroughs. His father was a laborer and worked for the company for his entire career, and he had a mentor and folks who helped him along the way. He’d almost gone in another direction career-wise, but was ultimately drawn to the excitement of Wall Street. He took a job at one of the largest and most successful firms on Wall Street hoping to “bag the elephant.”

You know the story, but…

…the firm wasn’t Jackson Steinem, it was Goldman Sachs. The company where he cut his teeth was not Bluestar Airlines, it was Ghost Motorcycles. The solid advice wasn’t from Lou Mannheim, it was from Sol Gittleman. And the young man wasn’t Bud Fox, he was and still is Anthony Scaramucci, Founder and Managing Partner of SkyBridge Capital.

To set the record straight, Scaramucci doesn’t think greed serves anyone, and he’s so disgusted with it and what’s happening on Wall Street that he’s written a book called Goodbye Gordon Gekko: How to Find Your Fortune Without Losing Your Soul.

“We need to be done with Gekko,” he said. “It’s been 25 years since we’ve met this guy and it’s time to put Gekko behind us.”

Scaramucci knows a bit about Gekko and the type – he’s been trying to avoid the Gekko’s all his life. Oliver Stone and his team hired him as a technical advisor to Money Never Sleeps, the follow up of the 1987 classic original Wall Street. Michael Douglas won the Academy Award for Best Actor for his depiction of the corporate dealmaker.

Goodbye Gordon Gekko contains several characteristics that Scaramucci has condensed into what and how he thinks you can make it without having to compromise your integrity or character, among others are Ambition, Success and Failure, Vocation and Meaning, and Knowledge. To the last point he delineates an uncharacteristic book list for further reading in this atypical Wall St. book…and Market Wizards is not on the list, but A Peace to End All Peace, The Odyssey, and Lincoln at Gettysburg are.

Scaramucci can relate to the class-jumping ability that Wall Street provides those who are ethically motivated to work hard. After graduating Tufts, he made his way to Harvard Law, where he “was destined not to become an attorney.” He bailed on law as a profession and, inspired by some friends he made at Harvard Business School, he joined the training class at Goldman Sachs in their Real Estate division.

Although Gekko is widely known for his “Greed is good” line, the renown line was originally uttered by Ivan Boesky at a Berkeley commencement. “Greed didn’t serve Boesky,” he said. “And it didn’t serve the bankers from the subprime morass either.”

It bothered him that he didn’t see the law degree through, and he announced to his Goldman bosses (and colleagues) that he was going to take the bar exam. They encouraged him and expressed admiration in that he was going to finish something he started. He failed the exam, however, and there was no way to save face. “Everyone knew I was taking the exam.” Not to be undone, he sat a second time after only half-assing (his words) through the prep and he failed the bar a second time.

But that was before the fun started. He then got fired from Goldman – but not because of failing the bar exam, but because he was not a good fit for the department. He was given his walking papers and an $11,000 severance check. He did have the good fortune to get introduced to the Private Client Group before he left, but he had to apply and go through the grueling interviews. (He didn’t have to re-submit his resume.)

After several years working for the Private Client Group at Goldman, he left and founded his first firm, which he eventually sold. Throughout his journey up to this point, he took notice of those who were successful, but he also took better notes on the cost for that achievement.

There were some big trade-offs, most that were detrimental in the long-term. Poor health, no friends, no relationship with your kids, and no marriage to speak of. This was not going to be his career path, and Goodbye Gordon Gekko is full of such tales of how Scaramucci cut his teeth on the street.

Refreshingly, both Scaramucci and his book speak of failures and lessons learned with great candor. I found that with Maria Bartiromo as well. There is no facade with Scaramucci, and that is rare for an absolute insider who has reached the highest echelons of Wall Street.

Because his failure is the vehicle by which Scaramucci learns the most about himself over the course of his ongoing career on Wall St., Goodbye Gordon Gekko will make a great Ethics textbook for undergrads and B-Schoolers alike. Such students, although highly educated, are still insecure in that they haven’t proven themselves yet and the sheepskin is all they can fall back on.

Wall St., especially trading, does not necessarily build character – it reveals it. Once you land on The Street, you quickly find out that, at least for traders, your P&L becomes the only credential that matters. Ivy League-this, MBA-that, pretty much go out the window.

Although his current firm SkyBridge Capital sits atop $7.5 billion in assets, to get there Scaramucci had to learn to be book smart and street smart. This includes a “family lesson” he was taught at the age of 17. It was Friday, January 9, 1981, 9 pm, 130th St. and Park Avenue. Central Harlem. Scaramucci’s uncle put all his family through a ritual of delivering a motorcycle in Harlem to teach all the Scaramucci boys a lesson.

As Scaramucci puts it, “there wasn’t really anything to worry about, although my mind got the best of me on the way there. They were just normal people who were living in a tough neighborhood.” The man was $30 short. Anthony, along with his doberman who made the trip, stood his ground and waited for the gentleman to return with “$30 in change and coins” to pay for the motorcycle in full. “It was the best education I could have gotten.”

With his free time, Scaramucci and SkyBrige host the annual SALT Conference in Las Vegas, which this year featured Bill Clinton as the main Key Note speaker. “President Obama was saying now is not the time to be going to Vegas. So what did we do? We went against the grain and did what we thought was best. We went to Vegas and we had over 500 people there.”

Goodbye Gordon Gekko is full of advice and hard-won wisdom. He’s reached the pinnacle, but also had to “look into the abyss” as Hal Holbrook’s Wall Street character Lou Mannheim said to Bud just before he was arrested. Scaramucci hasn’t had to look into the abyss though, and he absolutely doesn’t believe you have to for a great career – Wall Street or not.

Although SkyBridge is ranked about 22nd in size for a Fund of Funds, he is all character and very humble. “Michael, make no mistake about it. I FAILED – TWICE. I WAS FIRED from Goldman,” he said deliberately slowly to emphasize the point. “Yeah, you can say that I was re-allocated upstairs to Equities from Real Estate, but I was FIRED and that was all there was to it.”

Scaramucci obviously has made quite a comeback, and he didn’t have to sell his soul a la Bud Fox to do it.

Goodbye Gordon Gekko: How to Find Your Fortune Without Losing Your Soul is out on Wiley on Hardcover and Kindle.