Hey everybody. Happy Tuesday. Thanks for being here. As Ganja would say in tomorrow’s episode, please like and subscribe helps the algorithm. It feeds the algorithm. I don’t even know what the hell algorithm he’s talking about, but he knows I trust him. And then if you click the bell thing, you can apparently get alerted when we upload new videos and this and that. So please check it out. I want to talk to you about how I started to embrace the uncertainty myself in my own trading. Because again, when I first went to Wall Street, every assumption that I made was incorrect. I mean, almost everyone. I thought that with some basic training and actually being in Wall Street proper, that I’d be able to trade any asset class longer, short and be able to do so in any asset in any timeframe. Meaning I could trade short term, I could trade longer term because I didn’t know it at the time, but I had made the assumption that being on Wall Street and both the physical proximity, but also being in that community would give me an edge over the amateurs trying to do it at home.
And that obviously was completely incorrect.
But to my credit, I was able to study myself, study my own behavior, be honest with my feelings and have integrity around all that without judging myself. I didn’t have anything else to go on. I didn’t have a mentor, a coach, I didn’t have a father figure. I didn’t have any family friends who were successful at that. I had nothing to go on, but my own goals and aspirations for wanting to change my economic situation from going, which at that point in my time was mostly working summer jobs, working full-time, having landscaping, going around, building the landscaping company, then selling that and then having to find seasonal work because in New York have four seasons and the summer and the winter can tend to be extreme as far as polar opposites are called. I’m not saying that it’s the coldest place in the country or neither the hottest, but I am saying that the winter from the summer are as far apart as they could possibly be in terms of having the extremes. And so it’s obvious if you’re caddying golf bags in the summertime, you can’t do that in the winter unless you go south. And that wasn’t practical for me. I had things to do where I was, and likewise in the winter I couldn’t caddy, so I had to find seasonal work and that was waiting tables and this and that and hustling and making money to pay my bills. So having said all that, I
Remember it was so expensive to day trade. I guess I was lucky to be in that environment at that time. Round turn commissions on futures for the public on a day trade, I think was like $110 Overnight. Round turns were like 1 25 a contract. Stock commissions ran between one and a half percent of the invested amount to 3%. And so that wasn’t even working there. Whatever discounts they would afford you, they didn’t really want you trading. They wanted you to gather assets so that you could charge other people commission. They weren’t really interested in you trading your own account, at least at that time. So I had to really learn from my own behavior and say, okay, who are the people who were making money? And I won’t mention their names. I had mixed emotions about who they were as people, and I don’t want to bring any undue attention to them.
There were a few people though who had, at that point in time, a great amount of positions in companies that we know now, like Sun Microsystem, Cisco I Omega, and they had bought into these companies and held them, and they had adjusting for splits. They had in some of these instances, they had a cost basis that was under $5. And I said, Hmm, I want to definitely investigate that. I don’t know if my holding period is going to be several years to take into account these types of splits. But it was in the tech boom kind of leading into the internet boom, and the names were just flying. And so the reasons why a board of directors will determine a company should split is simply to make the shares more marketable. You see, at the end of the day.
So I had to figure out that calculus for myself. What was I comfortable with? What could I afford to lose because I didn’t have a lot to lose. And I mentioned this before about trading with an adequate amount of capital in the count, trying to trade futures where you put on a futures trade, you get the initial margin call and everyone can meet that, that’s your margin. But then there’s a point where if the thing moves against you, whether you’re short and it goes up and you’re long or it goes down, there’s a maintenance call. And typically you don’t want to meet margin calls, maintenance margin calls, those are the margin calls. They just call the margin calls. Typically, whenever you put a trade on, you have a margin call, but that money is liquid in the account. The ones that you don’t want, where people were cliff diving off of buildings were the maintenance calls.
They didn’t have the money, and those were the ones you have to bring your account back up to a certain level. And so the rule of thumb is, and this is still true today, that you don’t want to meet a margin call with cash. You offset what’s causing the duress in the account. That should seem obvious to you. However, when you look at where the stop would have to be in order for the name to go there against you, you could always set your stop well in advance of where that margin call would be triggered. So this way you can avoid all margin calls. I can’t recall ever having a maintenance margin call in my entire career because I spent a lot of time understanding the markets before I put on the trades, and I was also trading smalls. We didn’t have, I was trading one lots.
We didn’t have the micros or the minis at the time. They didn’t exist. And I’m old enough to know when the s and p futures contract, the one that was really liquid was $500 a point. It was probably 40,000 in margin for one contract, and it was big. Maybe it was 2019. I’m thinking 39,000. It might’ve been 19 if I’m wrong, but still that’s big for a trader. Starting out, if you had 25 K, could you imagine putting 20,000? So that’s why they decided to cut the einy to one 10th the size, and that certainly started the proliferation of doing a lot of electronic trading in futures. But the thing is, is that because I was so busy during the day talking with clients, speaking with them about the trading strategy that I was going to enact in their accounts, I needed to have a way to have somebody mind the fort when I was there, meaning someone babysit my positions.
So how else can I possibly do that if I’m out of the office down in Chinatown or wherever, I was in New York City speaking with clients, but I had risk gone. Some of you might be having panic attacks already. Now, I was too new to warrant having my own dedicated assistant based on my newness, my assets under management and my production, which is what they referred to as commissions and fees, which is kind of what you’re graded on, you’re graded on at that point. You were graded on the number of new accounts that you opened, the amount of net new assets that you brought in and the commissions and fees that you generated for that month. That’s what happens inside these firms. Nowhere in there is it like Michael improved, made 15% the month for a client. Another client had a baby and named their child, Michael Martin after them. That was not the interest of the company at all. Obviously things can change, but I know how they’re graded. It’s ultimately a game of gathering assets because then it’s very predictable. The more assets, the more the annual fee, and that creates more dollars that
Gets between the house and the person. So at the end of the day, I remember saying to myself, if I’m going to actually endeavor to do this, and for that short three year window kind of serve two bosses, I had a different agenda than the one that they had. I knew I needed to rely on the stops. There was no other way I could leave a newborn child, which I would consider a long wheat contract that has to be babysat, right? Because the thing could move 20 cents against you. There’s a thousand bucks. If you had 10,000 in your account, you just down 10%, even if the damn contract only moved two and a half percent itself on a price basis. So I learned very quickly that if I was going to try to escape this kind of purgatory that I was in, that I needed to embrace the uncertainty of having these positions on and keeping them on because the commissions were so strong, so high, but at the same time still go out and look like I was doing my day job to keep my boss happy, but then know that I rest assured that as while the outcry session, because these were all outcry session at the time, while the outcry session was in play, I had a protective stop on the floor to take me out of my position if the market moved against me, didn’t have to move sharply against me.
I just needed to know that there was that circuit breaker kind of thing that said, okay, boom, it’s hit here. It’s elected. You don’t care about slippage and skit either because you look back on the day and say, okay, beans or wheat, whatever, it might’ve been sugar. You say beans were off 20 cents. I got stopped at a 10 cent loss. It went down, it closed, it settled 20 cents on the day, but then it followed through weaker the rest of the week. So that’s when you’re sitting and you’re thinking, God, that there is such a thing as a stop order because it’s the point where you transfer the risk anymore. We talked about it a couple weeks ago. It’s okay to be wrong. You just can’t stay wrong. And so then I had to learn, how do you actually use a trailing stop? How do you do it?
And so then as the thing would work out in my favor, I needed to embrace the uncertainty. And I can remember my thinking at the time was if I was up, say 500 on a trade, I literally said, okay, that allows me to do five other trades and pay the commissions and not affect my principle because the commissions were so expensive at the time. So it also forced me, I should say this out loud, it also forced me to think longer term because nowadays commissions are effectively zero When you think about where they were 35 years ago, they’re down depending on who you talk to and who your clearing member is. And when you look at the exchange fees, they’re down between 95 and 99%. The transaction itself has become a commodity, and I know that there’s certain places that give the trades away for free, even though they’re probably collaring trades in front running and this and that.
So it’s not exactly free, but you don’t see the commission or the markup or the markdown in the event that they’re market makers in those securities. So I kept thinking, in order to combat the expenses of executing lots of trades, I need to be able to sit on my hands and let my winners run because it’s very punitive from a commission standpoint to kind of churn my own account, even though I had the dashboard in front of me at that time, which nowadays anyone could log in the internet. Back in those days, no one had internet. It didn’t exist. Very few people, less than half of my clients had their own computers. A handful of people had analog cell phones, those big daddy ones that Gordon Gecko had that had 30 minutes of talk time and were a dollar a minute talk time.
And so you had to play poker with your p and l as it also related to your trading, because again, if you made 500 bucks and the round turn commissions overnight were 1 25, the way I looked at it was like, okay, now I’ve got four free trades on some level. Very different mindset than the way it is today. So with you having the ability to churn your own account also as you talk about embracing the uncertainty you want to take a look at for all the trades that you’re doing, are you kind of running to stand still as is a two song running to stand still? And I don’t want to be that person sitting there spending hours and hours and hours in front of the screen trading like a banshee just because it’s free and just because I can but not making any progress.
So that to me is an economic bad. The lower commissions or the non-existent commissions are almost an economic bad for you because they induce you to do things that aren’t in your best interest, which is to overtrade. So I learned how to take risk home overnight, realizing that, hey, look, yes, once in a blue moon, something can happen against me, but I don’t really have a choice. I had to choose what I call the evil of two lessers. I had to either overtrade the accountant, get killed on commissions or hold onto my winners, realizing that once in a while I’ll see a sharp move overnight. Those fears, as people would say about a lot of fears in life, the things you worry about very rarely come true.
So I had to learn how to adjust my protective stops. There wasn’t a lot of overnight trading either. There wasn’t globex, for example, there wasn’t any of that plan, a kind of stuff where you could call the desk. So you were in the position until the opening bell. And I can remember going in and as I was breaking up my day, the front part of my day was to handle my risk management for my own trading account, to the point where I would call the floor and say, what’s the opening range look like? And sometimes they would tell you, sometimes they wouldn’t know. I’d call to earlier this and that, but I developed a strong relationship with the floor to get that information. And then I would try to plan out my day according to what the opening ranges were. Then I would say, okay, if that is the case, here’s where I would change my protective stop then.
So I did a lot of, I was like the king of cancel and replace, because every time you have a protective stop, you have to cancel that one and replace it with another order. Nowadays, it’s a click of a mouse, but back in the day, it was a little bit more mechanical. The last thing you wanted to do is say, okay, I’m long December wheat and my stop is at four 40. The market moves higher. And I say, okay, sell my one or two lot at four 50, but then leave the four 40 in because then as the market retraces, I’ll get knocked out of my long and be flat at four 50. But if I didn’t cancel the four 40, the market sees that as a sell so I could end up being short one or two contracts if I was stupid, I wasn’t.
I always wrote stuff down. I did make that one error that I wrote about. I’ll talk about that another time because running a little long today. But we’ll be here tomorrow with Ganja. Please like and subscribe, and again, if you think you want to be on the show, you can reach out and we’ll go from there. I can’t take everybody, this is kind of like a beta project in how I can be useful or how we can be useful together for the rest of the community. It might fail and fall on its face, but we’ll have to see. So I’ll probably take a couple of applications and then speak with you on the phone to see if it makes sense. If it doesn’t seem like it’s a good fit, don’t be angry because ultimately it’s a bit of an entertainment product, so it has to make sense for the audience. Anyway, thanks for being here and I’ll see you tomorrow with Ganja.
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