The subtitle of this chapter is taken from Mark Ritchie’s autobiographical book—a highly unusual blend of spiritual revelations, exotic experiences, and trading stories. It certainly does not mean to imply, however, that Ritchie believes he has deity-like trading prowess. On the contrary, the title refers to Ritchie’s convictions about the presence of God that he perceives in his life.
It is hard to imagine an educational background further removed from trading—Mark Ritchie attended divinity school. (No, it doesn’t help in praying for positions.) While attending school, he barely scraped by, working a variety of part-time jobs such as correctional officer (nighttime shift) and truck driver. In those days, he was so poor that when he drove a truck, he sometimes could not even afford to fill the tank. Mark initially got hooked on trading when he accompanied his bother, Joe, on a visit to the Chicago Board of Trade.
Mark spent most of his trading career on the floor of the Chicago Board of Trade, specializing in trading the soybean crush (explained in the interview). Although he was consistently successful as a floor trader, about five years ago he decided to try trading from an office.
Realizing that this type of trading was completely different from the trading he had been accustomed to, Mark Ritchie devoted himself to researching various possible trading approaches. The first year was fairly tough because his inexperience led him down many blind alleys. Despite these early difficulties, his off-the-floor trading proved remarkably successful. His trading account, which started with $1 million in 1987. registered an average annual return of 50 percent over the next four years.
Ritchie’s interests have ranged far beyond the world of trading. In recent years, he has become intensely involved in philanthrophic efforts aimed at helping a primitive Amazonian tribe. His involvement has not been confined to monetary contributions, but has included numerous extended stays living among the tribespeople. Ritchie has compiled a series of narratives told from the perspectives of the Indians into a recently completed manuscript. Victim of Delusion.
My first contact with Mark Ritchie occurred when he sent me his book, God in the Pits [MacMillan, 1987, inscribed with a beautiful compliment of my own first book. I responded with a letter, and further correspondence ensued. This book of interviews, however, provided the catalyst for our first meeting. I found Mark Ritchie to be very personable, low-key, and sincere. The interviews were conducted over several sessions in CRT’s offices.
I think you’re an ideal person to whom to address this question, since you’ve made a life of blending the trading business (much of it on the floor) with an obvious deep sense of ethics. There has been a lot of publicity about the ethics of floor brokers, as particularly highlighted in the relatively recent FBI sting operation on the Chicago futures exchange floors. Are we talking about a small fringe element, like in any other industry, or does the temptation of large dollar amounts actually lead to a more serious problem of dishonesty? Without mentioning any names, of course.
If I mentioned any names, I know you wouldn’t print them. How could you [he laughs’]? You’re starting off with the heavy stuff here.
It varies drastically from pit to pit. Each pit is almost a culture in itself. A pit has its own personality. I used to spend 90 percent of my time in the soybean meal pit, and the traders there are some of the nicest and most honest people I’ve known in my life. In one sense, you have to be awfully honest to be in this business, where huge transactions take place with a nod of the head. Having said that, though, there’s tremendous opportunity to cheat. However, I don’t believe there are any more cheats in this business than, say, among plumbers or lawyers.
Now there is a raving endorsement. It reminds me of a sign I saw for sale in a country store saying simply, “Honest Lawyer.”
[Laughing] That’s probably the only one they made, and they’re still waiting to sell it! There’s no industry that has a corner on crooks. Think of the jokes we can make about dishonest politicians. Essentially, I think there’s probably the same percentage of dishonest people in our business as in any other. The difference is in the payoff for a dishonest act. There are people on the exchanges who would fill orders for nothing, simply for the opportunity to bucket trades. In fact, I have been told there are brokers who would even pay to fill orders—if they could do it with a straight face. The broker who told me this said that the conflict of interest between trading his own account and filling customer orders was so great that the only way he could sleep at night was to refuse to ever do any customer orders.
What is your own opinion of the FBI’s sting operation? Do you think it uncovered a real problem, or was it overblown?
I think that all the honest people in this business were thankful that something was finally done. For years, I’ve been saying that if we didn’t clean up our own business, someone else would do it for us, and we wouldn’t like the result. Instead of a scalpel, they’d likely use a dull chainsaw.
Let’s switch the subject. In your estimate, what percentage of the people who come to the trading floor to make their fortune actually succeed?
Well, I really don’t know, but I’ll give you my best guess. I’d say roughly 10 percent do well, and maybe 1 percent do extremely well. But that’s only a wild guess. I’d be willing to accept anybody else’s percentages.
That’s a relatively low success rate. What would you say is the primary reason so many apparently fail?
Lots of people in this business who pass themselves off as successes are really failures. I know one person in particular who to this day writes articles in industry publications and is often quoted by the press, yet he hardly knows the first thing about successful trading. One time, I was holding a position in a volatile interest rate spread. The trade was going against me, and I was nervous about the position. This particular trader was holding the same position and seemed quite worried.
“Do you think I’m overtrading?” he asked me.
I questioned him about his account size and the number of contracts he held. “I have $25,000 in the account,” he said, “but I can’t afford to lose it, and I have a fifty-contract position.”
My mouth fell open. I had about $1,000,000 in my account for a position that was only twice as large, and I was even worried about that. “Overtrading, wouldn’t even begin to communicate it,” I said.
So he takes off half the position and says, “I’m OK now, right?”
“You’re not OK,” I said. “You haven’t even begun.”
There’s no way you can communicate with a person like that. I remember saying to the people who were clearing his orders that he was a walking time bomb.
Did he eventually self-destruct?
Absolutely, and he left the clearing firm with a huge debit, which he had to work off.
How do you decide when a position is too large?
I have a rule that whenever I’m still thinking about my position when I lay my head on my pillow at night, I begin liquidation the next morning. I’m hesitant to say this because it could be misconstrued. You know that I’m a praying person. If I find myself praying about a position at any time, I liquidate it immediately. That’s a sure sign of disaster. God is not a market manipulator. I knew a trader once who thought he was. He went broke—the trader, I mean.
I assume this sensitivity to trading too large or letting losses get out of line is one of the ingredients that has made you successful.
Absolutely. Magnitude of losses and profits is purely a matter of position size. Controlling position size is indispensable to success. Of all the traits necessary to trade successfully, this factor is the most undervalued.
As soon as you mention position size, you also bring up the topic of greed. Why did the trader 1 just mentioned hold a huge position backed up by only $25,000 he couldn’t afford to lose? I will not presume to be judgmental. A person must look inside for these answers. But it would be foolish to overlook the human vice of greed. The successful trader must he able to recognize and control his greed. If you get a buzz from profits and depressed by losses, you belong in Las Vegas, not the markets.
What other traits do you think are important to be successful as a trader?
You have to he able to think clearly and act decisively in a panic market. The markets that go wild are the ones with the best opportunity. Traditionally, what happens in a market that goes berserk is that even veteran traders will tend to stand aside. That’s your opportunity to make the money. As the saying goes, “If you can keep your head about you while others are losing theirs, you can make a fortune.”
Actually, I thought that line ended with, “…then you haven’t heard the news.”
[Laughing] That’s right. That’s the risk. Maybe you haven’t heard the news. But, on the other hand, it’s also often an opportunity. If it looks too good to be true, the rest of the market may know something that you don’t. But usually the way we miss opportunities in this business is by saying, “It looks too good to be true,” and then not doing anything. Too often we think that everybody else must know something that we don’t, and I think that’s a critical mistake.
How many times have you heard someone put down an idea you’re excited about by saying, “If it’s such a good idea, why isn’t everyone doing it?” This is the battle cry of mediocrity. Think about it for a minute. Any investment opportunity that everyone else is doing is by definition a bad idea. I would always recommend doing the opposite. The reason markets get out of line is because everyone is doing the wrong thing. The good trader always sticks with his own ideas and closes his ears to the why-isn’t-everyone-doing-it cry of the crowd. He’ll make a trade against the crowd at a conservative level that he can afford, and then get out if he’s wrong. That’s what a stop is for.
You need to have the courage to stand up against the crowd, decide your position, and execute it. One experience that really brought this home to me was when I was taking flying lessons. I had the theory down, but not very much experience. I was coming in for what was my second or third landing. When I was only about twenty or thirty feet above the runway, several gusts of wind blew the plane all over the place. I fought the plane down for what was probably the worst landing ever in history. When I finally brought the plane to a stop, I was actually chuckling at how terrible a landing it was, wondering what the instructor would say.
“Well, that was really impressive,” he said.
I laughed a little more and asked, “What was impressive about that? I thought it was terrible.”
He replied, “I have never seen any other beginner do that. Any other beginner would have taken his hand off the stick, given up, and expected me to land the thing. You hung in there and implemented the program all the way until the landing was complete.” He paused for a moment and added, “You’re right, though, it was terrible. Just terrible.”
I thought about that later and realized that that is the trait you have to have to trade.
That trait being what?
The ability to implement your ideas despite adverse conditions. There is no opportunity in the market that is not an adverse condition situation.
So the ability to think clearly and have courage when others are in a panic is an element of a successful trader?
Indispensable.
Is that an innate ability? I assume you either have it or you don’t. You can’t quite train yourself to act that way, can you?
I’m not sure, but I don’t think it’s innate. You can prepare for it by having a game plan, Once I had a coach who when I stepped up to the plate would yell, “Have an idea?! What are you going to do?” Investing is the same. You have to know what you’re going to do when the market gets out of line. Generally speaking, it’s human nature to hesitate.
What do you do to prepare?
I go through a mental process. I decide what I’m going to do when X, Y, or Z happens. If X, Y, or Z is a surprise, then you’re part of the crowd.
Your book God in the Pits was extraordinarily personal. Didn’t you have any reticence about being so open in print?
I remember one reviewer called the book “embarrassingly personal.” Sure there was some reluctance to he that vulnerable. In the first few months after the book was released, 1 could hardly look anybody in the eye who said they had read it, because I felt they knew more about me than was necessary.
Does that imply that you had second thoughts? Would you do the same thing all over again?
Yes, I would. My hope was that the book would make people take a long, honest look at themselves—at their relationship to others and their relationship to God. How could I expect people to honestly confront these questions unless I was willing to do the same. I’m sure that after having read the book, most people are probably disappointed when they meet me, because I can’t be as honest in person as I tried to he in print.
How did you first get involved in this business?
In the early 1970s, my brother, Joe, was working for a silver coin dealer in Los Angeles. He had come to Chicago to explore the possibility of setting up a silver arbitrage operation between the Chicago and New York markets. [Silver is traded in both New York and Chicago. Theoretically, the price should be the same in both locations. However, occasionally, large influxes of either buy or sell orders in one market or the other may result in a temporary price disparity. Arbitrageurs tend to profit from this aberration by buying silver in the lower-priced market and simultaneously selling an equivalent amount in the higher-priced market. Since many arbitrageurs are competing to profit from these transitory distortions, the price in the two markets will never get too far out of line. In essence, arbitrageurs try to lock in small, virtually risk-free profits by acting very quickly to exploit inefficiencies in the marketplace.]
Joe asked me to join him in visiting the Chicago Board of Trade. He also needed to borrow a suit. At the time, I had only two suits to my name. One was ragged and the other I had picked up wholesale for $60. Since Joe would do the talking, I gave him my good suit.
When we arrived at the exchange, we inquired at the president’s office about memberships and trading privileges. Upon seeing us, one of the exchange officials slowly eyed us from head to toe and back again and said, “You boys have got to be in the wrong place!”
Was that the end of the conversation?
No, but the whole conversation was about as strained as you might expect after an opening comment like that. Joe asked him about the possibility of getting a membership, but the exchange official just couldn’t get the smirk off his face. “Do you know the financial requirements to become a clearing member?” he asked disdainfully.
Did you?
No, of course not [laughing]. We had no idea! We couldn’t have guessed within two decimal places. The whole conversation was almost a joke. I was glad I wasn’t the one doing the talking.
After that inauspicious start, we made our way to the visitors’ gallery. I had heard rumors about the floor of the exchange being a wild place. We stood there watching for a bit. Although everyone was running around and there was a lot of noise, it didn’t seem as wild or exciting as we had expected. Suddenly, we heard this ear-shattering dung and the floor erupted into sheer pandemonium. Obviously, we had been watching the market before the opening. And this was a particularly hectic trading session. The crowd in the pits flowed from the bottom up and back again in waves. Our mouths dropped open in astonishment. At that moment, both Joe and I decided that this was the place for us. It just looked like a barrel of fun.
Did you have another job at this time?
Actually, I was going to seminary school, majoring in philosophy of religion. I had a job as a correctional officer working the midnight-to-eight shift. It almost covered the rent and tuition.
Did you ever finish divinity school?
Yes, after I got into the business. It took me seven years to complete the degree.
Were you planning to use your religious training?
I wasn’t headed to be a member of the cloth, although that was an option. I was mainly in seminary to answer some personal spiritual questions that were nagging me. I had no specific plans.
You had no real plans about how you were going to earn a living?
No, I was too idealistic for that. This was the late 1960s and early I970s. We had the feeling that if you just did right, everything else would take care of itself. You remember, this was the attitude that society thought was so naive.
How did you first get on the exchange floor?
About six months after our visit to the exchange, Joe’s company sponsored him to start a silver arbitrage floor operation. Several months later, I got a job with the company as a phone clerk on the floor. That job lasted for over a year. Then the volatility in the silver market declined sharply from the hectic levels of the 197374 period, and the arbitrage opportunities dried up. Or, perhaps more accurately, the opportunities were still there, but too small to justify an operation that was paying nonmember clearing rates. In any case, the company let me go.
Did you try to stay in the business?
I found a job for a company that was marketing commodity options to the public.
Now correct me if I’m wrong, but as I remember it, this was well before exchange-traded options, and the companies that were selling options at the time were charging the public exorbitant premiums. [The “premium” is the price of an option.]
Unconscionable prices. Rip-off levels. Their markup was approximately 100 percent. They would buy an option for $2,000 and sell it for $4,000.
When you went to the interview, did you turn down the job because you were aware of what was involved?
I had no idea what was going on.
Were you offered the job?
Yes.
Then what happened?
I worked there for about a day and realized that the entire operation was basically involved in cold calling. They had lists of possible investors and they called these people to convince them to buy options.
In other words, you found yourself in a boiler room operation?
Exactly [laughing]. I was introduced to what the other side of the business was all about.
After I was hired, I went to their training program, which was aimed at teaching us how to sell options. Since, at the time, U.S.traded options did not yet exist, they were buying the options in London and selling them to the public at a high markup. They had written scripts on how to sell. You’d call up somebody and say, “Hello Mr. so-and-so. We understand that you are a wealthy investor, and that is how we got your name. You are obviously the type of intelligent person who can appreciate this kind of opportunity.” You’d butter him up.
I’m sitting there with a trader’s mentality, and I’m thinking to myself that if I’m going to sell something to somebody, I want to know the track record.
Did you ask the instructor?
Certainly. He answered, “We make money for our clients.”
So I asked him, “How much? Exactly what am I going to tell the people whom I’m calling? What kind of percentage return can they expect?”
He stared at me as if I were asking frivolous questions, and with a suspicious look said, “Why would you want to know about all that stuff?”
In other words, was his attitude: What difference does it make?
Of course, that was exactly his attitude. “The point is to sign the guy up,” he said.
Well, what were you supposed to tell people when they asked you how much they could make on the investment?
Oooooh, “You’re going to make big bucks! Sugar is going to double!” Or you might hype a special sale. Sometimes they would come up with these specials where a $4,000 option was being sold for $3,000. My guess is that it was probably an option they had bought at $2,000, which was running out of time and about to expire worthless, and they just wanted to dump it. So they would call up all their people and tell them they had a special on this option.
How were you supposed to handle the question from the potential investor—and I use the term loosely—who asked to see a track record?
I asked a question exactly like that. The instructor said, “Our records show that 62 percent of our clients make money.”
Was he lying outright?
Well, I think he had some figures, but it was difficult to say what they meant. Maybe 62 percent of the clients had made a profit on a trade at one time or another. However, for all I know, most of them were wiped out. So I kept pressing the question.
Was his attitude: Stop bothering me kid?
Was it ever! Anyway, I kept on pressing the issue. I asked him, “Look, I’m selling an option for $4,000. At what price can the buyer sell it back?” You can always tell very quickly whether a market is legitimate by simply asking for a quote on the other side.
He gave me this funny look and asked, “Why would he want to sell it? He’s buying it from you. He’s going to hold it until he makes a lot of money.”
So I said, “Hypothetically, if he wanted to sell it the next day, what price could he sell it at? I’m used to a market. A market means that there are buyers and sellers.” He kept on evading the issue, and this went back and forth for a while. Finally I said, “Just tell me what you paid for the $4,000 option.”
He gave a deep sigh, leaned on his desk and said, “Now look. If you go into a furniture store and refuse to buy the furniture until the salesman tells you what he paid for it, he’s not going to tell you. You can ask that question all day, but eventually he’s going to tell you to fuck off. And that’s exactly what I’m telling you.” There was a long silence in the classroom.
How was the rest of the class reacting to this whole interchange?
They were beginners to the business and didn’t have a clue to what was going on. One of the trainees had seen a company salesman drive up in a Corvette, and that was all he needed; he was signed up right then and there.
Were you asked to leave?
No. But I was kind of embarrassed by the whole situation. I eventually mumbled something along the line that if most people were making money then it was probably all right.
But you didn’t really believe that, did you?
No, of course not. In fact, at one point, the phone rang and the instructor answered saying, “He’s on the trading floor, let me get him.” I thought to myself, “I didn’t know there was a trading floor in this building.” He opens the door to this big room, packed with people at desks—the so-called trading floor, which you have aptly described as a boiler room—and yells at the top of his voice: “Hey Bob, pick up the phone!” They loved that trading-floor-pandemonium ambience. I said to myself, “Trading floor? This thing is nothing but a con operation. These people are conning themselves.” In fact, a lot of dishonesty in this business begins when people are dishonest with themselves.
Do you really believe that they had glossed over the facts so much in their own minds that they didn’t realize they were completely ripping off the public?
I think so. I believe the majority of crooks have told themselves enough lies that they begin to believe them. For example, the floor brokers who were indicted in the FBI sting operation that we talked about earlier generally said, “Hey, I wasn’t doing anything anybody else wasn’t doing.” It’s not true, but I think they believe it.
Did you quit at that point?
I made a few half-hearted calls on the first day following the training session, but it had a feel of scam written all over it. I left after that and never came back.
Are there any trades that you would consider particularly memorable?
One that comes to mind occurred on the day the Falklands war broke out. People off the floor have the idea that the traders on the floor are the first to know what’s going on. Nothing could be further from the truth. The market erupts long before we ever get the news. We’re the last to hear what’s driving the market. On that day. I had taken a large position in soybean meal at what looked like a great price. By the time I got out of the position, in what was probably only one minute, I had lost $100.000.
Any other memorable trades?
I’ve always lost money faster than I’ve made it. One particularly striking instance concerned the roaring gold market during the period from 1979 to early 1980. Gold was sitting at around $400 when Iran took the hostages. I thought that the heightened tensions aroused by this situation would push gold prices much higher. But the market responded sluggishly, so I hesitated. The market eventually did go higher; it went to almost $500 over the next month. This was a classic example of not doing what you know should be done.
In other words, you failed to act decisively, a trait you cited earlier as one of the key ingredients to being a successful trader.
Exactly. I eventually ended up buying gold at just under $500 an ounce. And as you might guess, it went down the limit the day I bought it. Locked limit-down, in fact.
Did you think of getting out?
No. The hostage situation was still completely unresolved. Also, around the same time, the Soviet Union had invaded Afghanistan. I still felt the market would eventually continue to go higher. So I stuck with it. Of course, as you know, the market did go sharply higher.
Did you have a plan for getting out?
Yes, my plan was to get out whenever the market dropped 10 percent from its high.
Basically, your plan was to let the market run until there was some sign of meaningful weakness.
Right. Unfortunately, when the market dropped, it lost 25 percent of its value in one day. Needless to say, that was a particularly painful loss. But the point is that I still ended up with a large profit on the trade.
In fact, this trade raises the whole question of how you view drawdowns. Most people don’t distinguish between drawdowns in open equity and drawdowns in closed equity. [The distinction is that open equity refers to unrealized profits on an existing position. In effect, what Ritchie is implying is that he views a given loss differently if it is a partial surrender of profits on a winning trade as opposed to if it is a drawdown in a losing trade.] If I protected open equity [i.e., open profits] with the same care I protected closed equity, I would never be able to participate in a long-term move. Any sensible overall risk control measure could not withstand the normal volatility in such a move.
In other words, in order to score the really large gains, you have to be willing to see those gains erode significantly before getting out of the market.
I can’t see any other way. If you get too careful about not risking your gains, you’re not going to be able to extract a large profit.
How much do you risk on any single trade or idea (measured from trade initiation, not peak equity)?
About one-half of I percent. I think it’s generally a good idea that when you put on a trade, it should be so small that it seems almost a waste of your time. Always trade at a level that seems too small.
You spent approximately the first ten years of your trading career on the floor and then made a transition to trading from an office. Since you were very successful as a floor trader, I’d like to understand your motivation for making the switch. First, tell me, would I be safe in assuming that while you were a floor trader, virtually every month was profitable?
Yes.
Let’s take it one step further. What percentage of your weeks would you estimate were profitable during that period?
Ninety percent.
Most people would say, “My God, 90 percent of the weeks this guy makes a profit!” Why would you ever leave that type of an edge?
First I’ll give you my short answer: old age. Also, the soybean market had lost much of its volatility, which reduced trading opportunities. It seemed like the right time to try trading off the floor.
Did you have a plan on how you would approach trading from upstairs?
I had no idea. I checked out lots of things. I tried a number of advisory services but found that they were often not worth the time it took to listen to the phone tape. I eventually gravitated toward trying to develop my own systems. One of the things that amazed me was the unreliability of information by the so-called pros of the industry. For example, when I started working on testing and developing systems, I purchased price data from a company that marketed what they called a “perpetual” contract. [The perpetual price is derived by interpolating between the nearest two actual futures contracts to obtain a hypothetical price series that is always a constant amount of time forward from the current date (e.g., ninety days). The resulting price is a theoretical concept that will be a hybrid of two different contracts and cannot be replicated by any real-world trading instrument(s).]
I used this data for over six months before I realized that it was not a reflection of the real market. For example, the perpetual series could show a large price move that implied a profit that you could not have realized in the real market. When l discovered this, I almost fell off my chair. I couldn’t understand how anyone who had ever traded anything could have constructed this type of series.
I asked myself, “How can all these professionals who obviously know what they’re doing be following data that’s fundamentally foolish?” The question was easy enough to answer. After all, I had used it myself for six months. I had to go back to square one and start over. I never again trusted anyone else’s work.
Did you buy any commercial trading systems at the time?
Yes, I did buy a couple. One of them—1 don’t want to mention the name—was essentially a simulation package. I had assumed that if I could get a tool that would allow me to develop optimized trading systems, it would he a thousand times more effective than trying to approach the market by using charts. [Optimization refers to the process of testing a particular system, using many different values for the key inputs, and then choosing the single combination of values that worked best for past history. Although this procedure can yield wonderful performance for the past, it usually wildly overinflates the implied performance for the future.] Instead, I found the software was worthless. There again, I was amazed at the magnitude of ignorance of the people who had developed this system.
In what way was it worthless?
The software was a system that allowed you to optimize the market to death. In fact, this organization even recommended reoptimizing the system every week. In other words, curve-fit the program to last week so the trades this week will match what should have been done the previous week. I just got the overwhelming impression that whoever had developed the ideas for this system had never traded himself.
Did you ever find out if that was true?
[A long sigh] I asked that question, but they just dodged it. In fact, I remember the company salesman showing me how to enter the data manually. Personally, I prefer to get the data by computer, because manual entry just seems like too much work. Anyway, this fellow, who was himself a trader, said, “I don’t even pay for the price of the Wall Street Journal. I have a friend photocopy the price page for me.” I thought to myself. “Here’s a guy who’s marketing a program that’s being represented as the premiere trading system software on the market, and he doesn’t even have enough money to buy the Wall Street Journal.”
Did you actually try trading the system?
Yes, but the results were just spasmodic. Moreover, I was extremely uncomfortable with the idea of trading a black box (trading system computer software that generates buy and sell signals without revealing the rules of how the signals are generated]. I swore to myself that I would never purchase a black box system again.
Is your advice to people then: Forget what’s out there and do your own work?
My advice to people has always been: Stay out of the business; stay completely away from the market. For novices to come in and try to generate profit in this incredibly complex industry is like me trying to do brain surgery on the weekends to pick up a little extra cash.
I have a friend who knows three doctors who got together to invest in a stud race horse. When they took delivery of the horse, they found that it was a gelding. My friend was teasing them about this and asked if they had ever thought of inspecting the horse. You won’t believe this, but it turns out that they had thought of it, but they didn’t go any further. So he said, “Well, you guys are all doctors; did you ever bend over and take a look under there to make sure he had the necessary tools?”
If you asked those three doctors today what their mistake was, I’m sure they would tell you that they should have inspected the horse’s valuables. They still wouldn’t have learned the lesson: DON’T INVEST WHERE YOU DON’T KNOW WHAT YOU’RE DOING. If they invest in another horse, they won’t get a gelding, but they’ll make some other mistake just as laughable.
Do you mean to imply that people should just put their money in T-bills?
I think they can go with some of the managed funds or trading advisors that have proven track records. But I would take very seriously the standard disclaimer that says, “Past performance is no guarantee of future results.” Also, I don’t think you can make money unless you’re willing to lose it. Unless you have money that you can afford to lose and still sleep at night, you don’t belong in the market. My willingness to lose is fundamental to my ability to make money in the markets.
And that’s not true of most people?
That’s right. Most people come into this business without a willingness to lose money. They also enter the market with unrealistic expectations. Even if they’re lucky enough to pick a successful trading advisor, they’re likely to pull their money out the first quarter he has a drawdown. So they end up losing even though they may have been in a winning situation.
Actually, my empirical research has demonstrated the exact same conclusion. Several years ago, part of my job was evaluating outside trading advisors. In the process, I found out something particularly interesting. There was a handful of advisors who had made money every year. Yet even for this select group, less than 50 percent of their closed client accounts showed a net profit. That really brought home to me how poor most people are in deciding when to enter and exit investments. I think the natural tendency is to invest money with a manager after he has had a hot streak and to withdraw it after a losing streak.
Although you discourage people from getting into this business, let’s say that somebody comes to you with a serious interest in becoming a trader. What do you tell them?
I know this is going to sound patronizing, but honestly, I tell them to read your first book [The Complete Guide to the Futures Markets]. I slow them down by telling them to come back to me after they have digested half of that book, knowing full well that most of them will never do that.
So that’s the way you turn people away from the business. Now there’s a ringing compliment on my work if I ever heard one.
Actually, just picking the book up is a threatening experience. Seriously, I think your book gives people a good idea of the amount of work it takes to become competent in this business.
Is one of your motivations for trading having the ability to give a portion of your profits to charity?
Precisely, although I hate to put it that simply. In my youth, I was so idealistic that I thought the dollar was that unholy Mammon that one must resist in order to do humanity some higher good. I eventually learned that wealth has a great deal of inherent value. When you see somebody starving, what he needs is money.
I assume that you probably long ago passed the point where your trading profits took care of any personal needs or financial security you might envision. in your own case, if the charity aspect were not there, do you think you would still be trading?
I’m not sure that I would be. I just don’t know. Incidentally, let me correct your use of the term charity. I don’t think in terms of charity. I think in terms of investing in the poor. If someone is starving and you hand him a buck, you’ve taught him that what he needs is for someone to give him a handout. I prefer to invest in the poor—to provide capital so they can enhance their own productivity. What the poor need are cottage industries that allow them to become self-sufficient. That’s the type of funding I believe in, and it may not fit the conventional view of charity.
I know what I’m going to say can be easily misconstrued, but if 1 could set up a system where I could make money off the poor, then I would have achieved my goal. I know that sounds crass. Of course, my objective is not to make money off the poor, but the point is that charity tends to spawn dependency. That’s why the Great Society war on poverty was such a failure. In contrast, if I can establish someone in a business where he can return my money, then I know his situation is stable.
Would you mind saying roughly what percentage of your income you funnel into these efforts to help the poor?
As a sweeping generalization, roughly one-third goes to Uncle Sam, one-third I put back into my account to increase my trading size, and one-third I dispense to these various projects.
I know that you’ve become involved with Indians in the Amazon jungle whose tribal customs include killing members of neighboring tribes. Wasn’t there an element of fear in visiting this area?
No. They kill only each other; they don’t bother outsiders. One of their beliefs is that whenever someone dies, his death must be avenged by killing someone from another village. When that person is killed, his village will then seek revenge in turn, and so on.
You mean every time someone dies, they blame the death on a member of another village? It sounds like there wouldn’t be anybody left before too long.
They don’t blame the deaths of older people or young children on the evil spirits of another village member, but otherwise the answer to your questions is yes. Fortunately, their killing practices are not too efficient. However, their numbers have diminished drastically over the years, partially because of disease and malnutrition, but also because of this particular custom. I should add that the village I visited has been converted to Christianity and has given up this practice.
What has been your own involvement with this village?
I’ve gone down there for extended visits about four or five times since 1982. My efforts are directed to helping them progress. For example, I helped make all the arrangements for setting up a sawmill operation. The last time 1 visited the village, they were building gorgeous houses. If you had seen the squalor they once lived in—children playing with cockroaches on dirt floors, rubbing filth all over their little faces—then you could understand the euphoria I felt when 1 saw their new homes.
Aren’t you concerned that by helping Westernize these villages, their way of life will be destroyed to their ultimate detriment?
It’s a commonly held belief here in the civilized West that the cultures and life-styles of isolated peoples are to be valued and preserved. And I find that view romantically attractive. I would be inclined to agree with this premise if only I could find someone in one of these cultures who would stop laughing at it.
An Indian I know named Bee was once read a newspaper article about his beautiful culture. Bee responded by asking, “Where does this man live that he could be so foolish?” He was told that the man lived and worked in Caracas. “Why does he sit up there in his comfortable office and write this nonsense about us?” Bee asked. “Why doesn’t he come down here with his family and join us? Then we can all enjoy this beautiful place together.” They’re mystified by our lack of compassion. Academics make compelling arguments extolling the beauty and virtues of Indian culture, but I agree with the Indians.
So the Indians generally accept the intrusion of civilization?
Yes. I have never met an Indian who didn’t want progress. Sure, some of them want to maintain their beliefs and customs, but they all want the benefits of civilization. [Author’s comment: Although I question the generalization that civilization is beneficial to tribal societies, having read Ritchie’s Victim of Delusion, which describes the unimaginable brutality of life and death in this society (told from the perspective of the Indians), it is hard to rue the loss of their way of life.]
Let me make a rather abrupt transition from the Amazon to the world of trading. 1 know that you’re considering shifting from being a private trader to managing public funds. Since you have already been quite successful trading your own funds and have a sizable personal account, wouldn’t it just be easier to continue to do the same thing? Why undertake all the headaches that come with money management?
If dramatically increasing the amount of money traded is going to substantially reduce your profit per trade, then your implication is right: the profit incentive fees may not provide sufficient compensation for the degradation in trading profits.
But in your own case, you obviously feel that your approach is not volume sensitive.
That’s right, because it’s so long term.
Let’s talk about specifics. On average, how many times a year will your approach signal a shift from long to short or vice versa in a given market?
Generally speaking, between one and five times per year in each market.
That’s probably far fewer than most people would think.
Right. Of course, I would prefer only one trade per year. In fact, perhaps my best trade ever was one that I held for over four years.
What trade was that?
I was long soybean meal and short soybean oil and just kept rolling the position over.
What kept you in that trade for so long?
Monthly profits.
[At this point, Joe Ritchie enters the room. He is carrying a tray of coffee and dessert. The interview with Joe continues in the next chapter.]
Five basic trading principles appear to be elemental to Mark Ritchie’s trading success. These can be summarized as follows: