How to go from Dead Broke to $6MM in 2 Years

There’s an old joke I heard Woody Allen tell that goes back at least as far as when the Poconos were a big vacation spot….there were two older ladies sitting in a restaurant in the Poconos, complaining about the food. The first said, “The food here is terrible.” The second lady concurred saying, “That’s for sure, and not only that, the portions are too small.”

That’s how I, and most of us, feel about Wall Street—the place is terrible—they crashed the economy and the compensation is outrageously high, but the worst part is that the participation is too small by at least one person—Me. I’m not part of it, earning those huge salaries and bonuses.

Feeling left out and wanting to make some of that loot ourselves, some of us, myself included, decide periodically to take matters into our own hands and learn to trade stocks, which sometimes leads to “day trading”, the process of buying and selling a stock (or some other financial instrument) in the same day.

For most of us, if we’re lucky, this foray into day trading results in only small losses, but sometimes you can lose a lot. You can also, if you are really good, make a lot of money quickly, but that’s the extremely rare exception.

This story is about the only person I know who has been able to do just that, going from virtually dead broke--no career and the IRS after his property, to then parlaying the last of his savings (about $80,000 that was in reality owed to the IRS) into a small fortune worth north of $6,000,000. He accomplished this in under two years.

I want to state unequivocally that this story is completely true, strange as it may seem.

This story starts in the middle, about 9 months ago, when a friend of mine from Westminster, Dave (his real name) and I decided to take a trip to see Joe (not his real name), and watch him day trade, which he’d kindly consented to let us do—he’s an old friend from college, and we’d been corresponding back and forth quite a bit, about investing as well as socially.

We arrived at a sunny, blazingly hot airport in Florida on a Sunday afternoon, spent the evening barbecuing fresh fish and drinking wine on the beach, and then Monday morning gathered in Joe’s “trading room” to watch the action. It was one of the more surreal things I’ve ever experienced.

The setting wasn’t what we expected. Joe’s ‘trading room’ was really a semi-converted garage with the distinction of being the only non air-conditioned room in his condo. So, here’s the setup for our wildly successful trader and his students: Because it was so hot, we all sat around in gym shorts, no shoes and no shirts, except maybe a T-shirt, and hot anyway.

Joe had a fan blasting on us, which kept blowing papers all over the place. There was one computer on an old desk in the corner, and a small TV blaring CNBC to the left. Dave sat on a pool table covered in some sort of health food packets mixed with other piles of paper, while I sat in a kitchen chair I’d carried down the stairs.

Periodically throughout the day, particularly when a thunderstorm rolled through, Joe would have to climb under the desk to reboot the internet connection, or wander the house to clean up after the seven cats that shared his condo (all but two came with his girlfriend and her daughter when they’d joined forces). My friend and I, as we sat there sweating despite hurricane force winds from the fan, were really wondering what the heck was going on—this wasn’t quite like a scene from “Wall Street” or “Bonfire of the Vanities”. Where were all the fancy computers, Rolexes and expensive desks?

Then the trading started, and it got even weirder. Joe trades in a number of financial instruments on different software platforms, and today he was trading stock futures, ETFs, and options. He leaned back in his chair, happy to have some company, and calmly explained to us exactly what he was doing, and what he expected to happen in the markets that day, paying more attention to us than the computer screen, which Dave and I were staring at in disbelief, our mouths hanging open.

Joe prepares exhaustively for each trading day and therefore had prepared a theory of what this day would bring. Today’s hypothesis was that the market would open lower, drop for a bit, and then rally and go up, so he’d gone long (meaning he bought futures and options in the expectation the market would rise). However, he didn’t just buy a few—using leverage, he’d bought control of a couple million dollars in stock futures that day, and some other whopping quantity of options, and for now only the first part of his hypothesis was coming true—the market had opened lower, and it was continuing to drop, and as it dropped, Joe bought more of everything, building his positions.

Dave and I watched in amazement, and mentioned to Joe numerous times what was going on, even though we knew he knew what was going on-- his profit and loss flashed at the top of the screen, now almost always ‘red’ with a negative sign. As Joe continued leaning back in his desk chair, shooting the breeze and telling us what was going to happen next, the value of his portfolio continued to drop, ending up down about $32,000 in the first hour and a half, while he barely seemed to be paying attention except when he added to his positions.

As Dave and I discussed later, we each would have considered taking a gun to our heads in that situation, but not Joe. He was extremely aware of what was going on, but didn’t even seem perturbed by it.

Then, about 10:30 or 11:00 the market turned and started back up just as he’d predicted, and the profit and loss on the screen started climbing back towards positive territory.

Joe had so much money invested by this time that his P&L fluctuated by $1-2,000 every few seconds. In a half hour or so he was back to even, and by day’s end he had a nice tidy profit of $76,000!

That’s more than most people make in a year. His reaction to making the money was about the same as losing it in the beginning--it was all in a day’s work. For me and I suspect Dave, we’d have been carted off to an asylum somewhere, and that’s when I began to suspect there was a lot more to this day trading, and stock trading in general, than just knowledge and brains.

It also took, as we somewhat crudely phrased it, “balls of steel”, but even that doesn’t quite capture why Joe is successful, as that attitude could also be a recipe for losing everything.

What is it about Joe that makes him successful where so many others fail? Joe and I have been friends a long time, and while many of us stay around the average, Joe’s life has had a lot of extremes, this phase of his life just being the latest installment. He’d already made and lost a fortune one time before.

Just two short years before, the beach “house” (actually a cabana) where we’d barbequed the night before was in danger or being taken by the IRS for nonpayment of taxes, because Joe had neither money nor a job.

Mandatory Disclaimer: This is my interpretation of events and financial processes. I’m not a licensed broker, and don’t even claim to be successful at trading, and stock trading definitely carries a big risk of losing money. If you are really going to trade stocks, get more information than what I know about it. This article is not written to give investing advice. Joe told us he’d be happy to show us what he does, but he also said he wasn’t sure it was something he could teach.

So although you can learn something about how to trade stocks, including what the terminology means, and maybe even develop a method of investing, what this is really about is the personality it takes to succeed as a financial trader, and how one person did it.

In-the-70s

I first met Joe at college in the 70s, and as many of you who lived through this period in history know, the 60’s decade really didn’t end until about 1976 or so. Consequently Joe (and I) had long hair and beards and looked like hippies, although neither of us really were. Joe’s hair was so long and frizzy that he actually had to wear two ponytails. We were attending a highly respected but ‘alternative’ college, where pretty much anything went, a situation we took full advantage of, but even in this situation Joe’s personality was out of the ordinary—he was highly competitive and focused, which manifested itself during the college years mainly in his tennis game. Tennis isn’t a team sport. It’s one you play on your own, just like trading, and in retrospect it seems that the ability to focus 100% on winning during a tennis match is the same trait that now allows Joe to focus single mindedly on winning at stock trading.

An example (that still make me laugh) illustrates this, but to fully appreciate this story it’s important to realize that Joe’s an accomplished tennis player—not just a good weekend player or good club player, but at times when he was younger a nationally ranked player—as a teenager he hit and was friendly with some of the top players of his day, including Vitas Gerulitis, and in the Junior Nationals he played in the same tournaments as Jimmy Connors, Harold Soloman, Roscoe Tanner and Eddie Dibbs (he lost to the #9 player in the country 7-5 in the third set). In Florida, a huge tennis state, he’s been ranked in the top 10 for his age group 6 times, a number that would be higher if in other years he’d played in enough tournaments to qualify to be ranked. I consider myself a decent tennis player, but when we last played tennis I didn’t win one point in the first four games.

For those of you unfamiliar with tennis tournaments, in the early rounds players often have to make their own line calls, meaning a player gets to call his opponents shots in or out, which as you can imagine, makes for some arguments when the shot is close. The rules of tennis are strict on this—if you cannot call a ball ‘out’, you have to call it ‘in’, but without a referee or line judges some players take advantage of this rule (or else just don’t see well), and call balls out that were really in. So Joe was playing this fellow who kept calling his shots out when they were really in, and they were arguing about it, so Joe decided to insist on a referee before they continued. First however, I suppose to even the score, he actually caught his opponents ball in the air while sanding right in the middle of the court, and called it ‘out’. Point to Joe. His opponent was furious, but it didn’t matter—it was Joe’s point, and after that they had a referee and Joe won. To pull a stunt like that in a major tournament shows a complete focus on winning while not caring about anything else—you can focus on the goal.

After college Joe remained in Florida and eventually cut off his ponytail and went to work as a stock broker. At this he was quite successful, building up an excellent clientele while learning the business, and also making his first few million dollars by trading on his own account. This all ended in the stock market crash when the high tech bubble burst, and that’s how Joe and the IRS became so intimately acquainted—to make that first $3 million he’d had to pull money out of his 401K, and when the market crashed, besides losing all his money he also still owed the ‘early withdrawal penalty’ on the 401K. Again there is a personality trait at play here—a willingness to go “all in” on an idea. Most successful entrepreneurs have this attitude. Earlier we published an article about the Oakmont graduate Bret Williams, who mortgaged just about everything in his life to buy a struggling business, Green Mountain Beverage/Woodchuck Cidery, which is now the nation’s largest producer of hard cider, bottling 5-600 bottles of cider per minute. [Update: An Irish conglomerate recently purchased Woodchuck for $306,000,000.] Joe saw the stock market rising and went for it, investing everything, and it paid off handsomely for awhile. Unfortunately, not all good ideas remain good ideas, and as he memorably said, referring to CMGI stock, “who’d have ever thought a stock worth $160 would drop all the way to $1 a share?”

As an aside, the most influential book I’ve read lately is an investing book titled The Black Swan by N.N. Taleb—Mr. Taleb contends that events have become so random that predictions are almost impossible, so we have to be prepared for the completely unexpected. As our society becomes more and more complex, there is a greater opportunity for things to go wildly or catastrophically wrong. Just look at the BP Oil spill—you can’t make a mistake like that without the technical knowhow to drill for oil a mile under the ocean. The last financial crash was another example. Our whole banking system nearly collapsed, and still might, due to problems in ‘securitized mortgages’, a type of financial instrument that didn’t even exist ten years ago and which most of us had never heard of until the stock market collapsed. When is the last time you heard of a business five year plan working for even one year?

On one level Joe’s theory of investing is remarkably simple—form a hypothesis of what will happen on a given day, buy the right financial instruments to take advantage of what you predict, and buy in and shed out gradually from the positions. That part is easy enough, particularly since Joe was kind enough to send me, each morning, what was going to happen. So after fooling around with “play money” on various trading platforms, I decided to give it a try, and learned shortly thereafter that there is another aspect to Joe’s trading technique that isn’t so readily transferable. It’s the ability to improvise in a real hurry when things start deviating from the plan, and to do that you need a deep well of experience in the stock market. Playing the financial markets isn’t like a chess game, where there is one correct move in a strictly defined universe. It’s much more like backgammon. In backgammon, and other similar games of chance, there is generally just one correct play to make in any given situation, but you’ve still got to roll the dice, which might make you a loser even if you made the right move. So you’ve got to be prepared to lose many times even if you do everything correctly, and be able to completely readjust your strategy based on each successive roll of the dice.

In other words, you’ve got to be prepared to lose almost as often as you win, and it’s real money and sometimes those losses will be quite large. At the beginning of this article I mentioned that Joe made $70,000 on a Monday. He also made about $30,000 on Tuesday, broke even on Wednesday, and then we left so I don’t know what happened on Thursday and Friday. However, I do know that on one day in the prior month he’d lost $300,000. I can’t even comprehend losing that much money in a span of seven hours, yet that’s what you have to be prepared to do if you want to have days when you make $300,000. You’d just better be damn sure you have more up than down days, but you’ve also got to have a certain personality type just to belly up to the table.

My personal foray into day trading didn’t work out so well on an hourly basis; I probably spent 300 hours learning about the market and made about $2,000, which is below the minimum wage in China…..but I did learn a lot, which helped me invest longer term and prevented me losing money in the last big drop. One thing I learned is that stocks go down a whole lot faster than they go up. Another thing I learned is that staring at a computer screen for hours on end can be interminably boring, and then out of nowhere things will explode. I also realized that this type of trading wasn’t for me. For one thing I wasn’t crazy about sitting there for most of the day just watching stock ticks, but I’d have done it if it looked more financially promising. What I realized was that I just didn’t know enough about the financial markets to improvise fast enough while day trading when things go awry. Even predicting medium term movements of the stock market are often impossible, but sometimes things resolve themselves enough to make a more high probability investment. I try now to limit my investing in the stock market to only times when things look predictable and it seems like we’re in a trend. So right now I’m not playing the stock market. Who’d have been able to predict the sovereign debt crisis in Greece or the BP oil spill? Not even Joe, who with his many years of experience as a stock broker has developed a sixth sense about what’s going on in the market. I still follow the market closely, so maybe someday I’ll have that too, but for now I feel more comfortable investing medium term.

Joe, however, is still playing the market intraday, and still telling me what’s going to happen, and after a rough spell, he’s back on the beam. In case you are wondering what those updates are like, here’s a summary from last week:

[Regarding] making the right moves - which obviously leads to profits. Look at some of my week starting with yesterday.

 

  1. Fri --I was flat on trading but made money overall from my short positioning holds and VXX. A couple of nice dances covering and putting out again my short SPY. Where I gave it back was going short ES at 1088 in the afternoon after it had hit 1084. It seemed to stall at that 1088 spot. Well, it didn't stall. It ran 1090 and started to fly. I covered at 1095. It topped out at 1098 (?) before the late swoon to as low as 1084. That's 1084 to 1098 to 1084 and close -- WOW! How do you design a trading strategy to deal with that? That's the issue. For me it's why I'm positioning short on up spurts and lessening them on plunges. Right now when the love starts to flow and volatility drops - I do some short positioning. The trading always goes by feel intraday. Sometimes it goes like yesterday afternoon and there's nothing one can do about it. You look at it and say "well are you worried about Europe and Spain or not? And what was that spike up just before the spike down close all about?"
  2. I had a really good Wednesday with the late day plunge and earlier trades. I did cover 1/2 of my positions in the downdraft. I even covered some SPY and sold some VXX after hours as they spiked further. Wednesday night things were looking pretty good for a queasy Thursday to cover into and I went to bed with that in mind. Whoa! Up 20 handles when I woke up. Gave back 2/3rds of the profits. It happens. That's why I lighten up as things work. While one may not like that, I was pretty far ahead even with the S&Ps back to the levels I originally shorted at.
  3. The fact is all this doesn't faze me. When it's over it's over. I could have made a lot more money this week if I was perfect or held positions longer that were working for me or initially went against me. But I don't think like that. I had a really good week overall and if I wasn't doing whatever it was I did this week, I'd be a lot poorer than I am today. It's time to look to next week and plot what's coming on the agenda and line up opportunities and theories so I'm ready for whatever happens……… The beach was beautiful last night.

As you can see, Joe is quite the character and a romantic to boot. Two more short stories illustrate the personality necessary to succeed.

As I mentioned before, Joe is a great tennis player, yet he is still playing with a ‘quiver’ of older racquets. Tennis racquets today are much better than they were a few years ago, but Joe is still playing with older racquets. It’s not because he wouldn’t like new ones, certainly not that he can’t afford them, or really not even that he doesn’t want to spend the money. He’s just careful with his money. Joe is one of the most generous people you’ll ever meet, yet he’s more than just not ostentatious. He values money and is careful not to waste it, but on the other hand he offered to pay my way to go skiing in Utah. I think he got those traits from his father, who was an immigrant from Eastern Europe. Even when he was older, and had made a fair amount of money, his father couldn’t even conceive of paying $50 for a bottle of wine. That, by the way, is an old way of thinking that is making a resurgence thanks to the Great Recession.

Speaking of that ski trip to Utah, I found out that Joe skis like he trades. We were at Snowbird, one of the most expert mountains in the world, and Joe almost always went down the most extreme slopes. I’ve been skiing for years, but there was not a chance I’d go down some of those runs. The expert runs at Mt. Wachusett are considerably less difficult than all but the easiest runs at Snowbird. Joe skied the double black diamonds, but it’s how he skied them that was telling. He didn’t go blasting down those slopes. Rather, he methodically plotted his course down the trail (or cliff to be more accurate), took it nice and easy, always kept moving but always under control, and rarely fell. Me, on the other hand…..I went barreling down the slopes, fell more in a week than I had over the past twenty years, and was lucky I didn’t hit a tree.

Financially, Joe’s course down the mountain has changed somewhat since March 10, 2000, when high tech cratered and he lost everything. He’s still going down the double black diamonds, but he also takes breaks in the lodge. Periodically Joe pulls money off the table to invest in tax free municipal bonds, dividend stocks, and bargain priced real estate. Perhaps in retrospect making and losing a fortune was a character building experience, but once is enough.

Oh yes, and during our ride up the Snowbird chairlift on day 1, while I was admiring the view, Joe sold gold futures on his ancient Palm phone, making $90,000 before we unloaded at the top. Luckily I didn’t fall out of the chair because it was a long way down.