The New Market Wizards: Conversations with America's Top Traders (12 page)

Besides the British pound trade we discussed earlier, what other trades stand out as particularly prominent in your twenty-year career?

One of my favorite trades was being short the Canadian dollar from about 85 cents down to under 70 cents during the early 1980s. Up until about five years ago, the Canadian government had a policy of not intervening aggressively to support its currency. It would intervene halfheartedly at obvious points (for example, 120 to the U.S. dollar, 130, 140) for a few days and then let the Canadian dollar go. It was a very easy move. I was able to hold between one thousand and fifteen hundred contracts for virtually the entire decline, which spanned five years.

Was the fact that the government was intervening to support the Canadian dollar, albeit inefficiently, a reinforcement for being in the trade? In fact, is that one of the things you look for in a currency trade—being on the opposite side of the intervention trend?

Exactly. Of course, you have to be careful in situations where intervention might be forceful. But as I mentioned, at the time, intervention in the Canadian dollar was never forceful. That government policy, however, changed in the course of the price move I’m talking about.

The Canadian dollar eventually declined to 67 cents. Then, one day, it opened 120 points higher. The next day it opened 120 points higher again. My profits declined by over $1 million on each of these two successive days, which helped wake me up a little bit. On the third day, there was a story on Reuters quoting Prime Minister Mulroney, and I’m paraphrasing here, “We will not allow Chicago speculators to determine the value of our currency. Our currency is solid and we will not permit it to fall apart because of a bunch of gamblers.” Touché.

I take it that you got out at that point.

Right, that was the end of it. When the trade was easy, I wanted to be in, and when it wasn’t, I wanted to be out. In fact, that is part of my general philosophy on trading: I want to catch the easy part.

How do you define the “easy part”?

It’s the meat of the move. The beginning of a price move is usually hard to trade because you’re not sure whether you’re right about the direction of the trend. The end is hard because people start taking profits and the market gets very choppy. The middle of the move is what I call the easy part.

In other words, the markets you’re least interested in are the tops and bottoms.

Right. I never try to buy a bottom or sell a top. Even if you manage to pick the bottom, the market can end up sitting there for years and tying up your capital. You don’t want to have a position before a move has started. You want to wait until the move is already under way before you get into the market.

Do you see that as a mistake that many traders make, spending too much effort trying to pick tops and bottoms?

Absolutely. They try to put their own opinion of what will happen before the market action.

You talked earlier about the general desirability of being on the opposite side of central bank intervention. Let’s talk about situations in which such intervention is very forceful. To take a specific case, in November 1978 the Carter dollar rescue plan, which was announced over a weekend, caused a huge overnight price break in foreign currencies. I assume that, being a trend trader, you must have been long going into that announcement.

I was extremely long, but I had liquidated over half my position a week earlier.

I don’t understand. What was your motivation for liquidating part of the position? As I recall, there was no evidence of any weakness before the actual announcement.

The upmove was decelerating instead of accelerating. It’s possible to see market weakness even when prices are still going up and setting new all-time highs. I had been long both the Deutsche mark and British pound. I sold my Deutsche mark position and kept the British pound.

Can you describe what your response was on Monday morning when the market opened drastically lower?

I knew the market was going to open sharply lower well before the opening. I was very lucky in being able to get a couple hundred contracts sold in the futures markets, which was locked limit-down. [Since the cash currency market was trading far below the permissible daily limit decline in futures, there was a plethora of sellers at the limit-down price, but virtually no buyers; hence, the market was locked limit-down. Presumably, there were some naive buy orders on the opening from traders who didn’t realize that the cash market was discounting an additional two limit-down days in futures, and these were the orders that partially offset McKay’s sell order.]

I liquidated the rest of the position in the bank market, which was down about 1,800 points [equivalent to approximately three limit-down moves in futures].

You just took the 1,800 point loss on the first day?

Of course.

Would the loss have been greater if you waited until the futures market traded freely?

It would have been a little worse.

In catastrophic situations, when a surprise news event causes futures to lock at the daily limit and the cash market to immediately move the equivalent of several limit days in futures, do you find that you’re generally better off getting out right away, as opposed to taking your chances by waiting until the futures market trades freely?

There’s a principle I follow that never allows me to even make that decision. When I get hurt in the market, I get the hell out. It doesn’t matter at all where the market is trading. I just get out, because I believe that once you’re hurt in the market, your decisions are going to be far less objective than they are when you’re doing well. And if the market had rallied 1,800 points that day to close higher, I couldn’t have cared less. If you stick around when the market is severely against you, sooner or later they’re going to carry you out.

How much did you end up losing in that overnight break?

About $1.5 million.

I assume that was your worst loss up to that point.

It was.

Can you describe what your emotions were at the time?

As long as you’re in the position, there’s tremendous anxiety. Once you get out, you begin to forget about it. If you can’t put it out of your mind, you can’t trade.

What other trades in your career stand out for one reason or another?

Are we talking both winners and losers?

Sure.

[
He laughs.
] I missed the giant gold rally in 1979, which culminated in early 1980. I had tremendous anxiety attacks about missing that move.

Can you tell me why you missed it?

The market simply ran away from me. Every day I thought, “If only I had bought it yesterday, I would have been OK.” But I had a twofold problem. First, here was one of the greatest price moves in the history of commodities, and I was missing it. Second, the cash I had in the bank was steadily losing value because of the inflationary environment. I felt really horrible about the situation. I finally ended up buying gold on the exact day it made its high. I bought fifty contracts. The next day, the market opened $150 lower. I was out $750,000, but I was so relieved that the torture was finally over that I couldn’t have cared less about the money I lost. In fact, I was actually praying for the market to open lower.

In essence, then, you just went long to stop the pain.

That’s right.

It sounds like you found that the pain of missing a move was actually far worse than being on the wrong side of the market.

It was—at least in my first ten or twelve years in the markets. I hope that I’ve become somewhat more mature now and no longer feel that way.

What did you learn from that experience?

I learned that you have to be more concerned about the moves you’re in than the moves you’re not in. I didn’t always realize that. In those days, if I had a small position instead of a big one, I would actually hope that the market would open against me.

Are there any other trades that stand out on the losing side? For example, what was your worst loss ever?

My worst loss ever.
[He laughs as he slowly repeats the phrase, mulling it over in his mind.]
In 1988, I became very bullish on the Canadian dollar once it broke through the 80-cent level. I started steadily building a large position until I was long a total of two thousand contracts.

What made you so bullish?

I had always been very good with the Canadian dollar. The market was in an extreme bull move and it had just broken through the psychologically critical 80-cent level. I just felt very strongly that the market was going to move much higher.

Anyway, this was going to be my second-to-last play. Ever since my early years in this business, my goal has been to take $50 million out of the market. I wanted $25 million in a bank account so that I could live as high as I wanted off the interest, and another $25 million to play with—to buy a newspaper or a baseball team. (In those days, you could buy a baseball team for that amount of money.)

I had planned from very early on that my last trade was going to be five thousand contracts and my second-to-last trade approximately twenty-five hundred contracts. This was that trade. My plan was to hold the position until the Canadian dollar reached the 87–88-cent area, a price move that would net me about $15 million on the trade. My next play would be to make $30 million, and then I would be done.

That was the plan, but it didn’t work out that way. At the time, I was having a house built in Jamaica, and I had to go back every few weeks to supervise the construction. One Sunday evening, as I was leaving to catch a connecting flight to Miami, I stopped to check my screen for the currency quotes in the Far East. The Canadian dollar rarely moves much in the Far East market. I was startled to see that the price was 100 points lower. I literally had the bag in my hand, and the limo was waiting. I said to myself, “The Canadian dollar never moves 100 points in the Far East. It doesn’t even move 20 points. That quote must be a mistake. It’s probably just off by 100 points.” With that thought in mind, I walked out the door.

It wasn’t a mistake. The market opened more than 150 points lower on the IMM the next morning. To make matters worse, I had no phone in the house. The best I could do was to go to a nearby hotel and wait on line to use the public phones. By the time I got my call through, I was down over $3 million on the position.

What caused that sudden collapse in the Canadian dollar?

At the time, the Canadian election was about a month away. The prime minister, Mulroney, had an enormous lead in the polls over his opponent, Turner, who espoused extremely liberal views, including his support for an independent Quebec. There was a debate that Sunday evening and Turner destroyed Mulroney. The next morning, the polls showed that Mulroney’s overwhelming 24 percent lead had shrunk to a mere 8 percent margin overnight. All of a sudden, the outcome of the election, which had been a foregone conclusion the day before, appeared to be a toss-up. To make matters worse, at the time, Canada and the United States were in the midst of delicate negotiations on a trade agreement, and a Turner victory would also have placed that agreement in jeopardy. This sudden uncertainty on the political front threw the market into complete turmoil.

Did you get out of your position?

I got out of about four hundred contracts, but the market was down so much that I couldn’t see it going down much further. The next two or three days, however, it broke even more. By that time, I was out $7 million. Once I realized I was down that much, I told my clerk, “Get me out of everything.”

Was that the bottom of the market?

It was the exact bottom. Within a month, the price was back to where it had been before the debate.

Did you miss the rest of the move?

I missed the entire move, and the market eventually surpassed my original target. I had made $2 million on the rally and lost $7 million on the break, because I had been adding all the way up. Instead of earning the $15 million I had planned to make on the trade, I ended up losing about $5 million.